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OSMANIA UNIVERSITY LIBRARY 

C3alINo.2>2)®’(^ Accession No. Q,r79ol 

Author T , 

Title f ■ 

This bode should be returned on er before the date last marked below. 




The Folklore of 
Capitalism 


By 


Thurman W. Arnold 


New Haven 

Yale University Press 

London, Humphrey Milford, Oxford University Press 



Copyright, 1937, by Yale University Press 

•M* 

Printed in the United States of America 

First Published, October, igs 7 
Second Printing, December, igs 7 
Third Printing, January, jgj8 
Fourth Printing, January, jgj8 
Fifth Printing, January, 1938 
Sixth Printing, February, 1^38 
Seventh Printing, April, igj8 
Eighth Printing, August, igsg 
Ninth Printing, November, ig40 
Tenth Printing, January, ig43 


All rights reserved. This book may not be reproduced, in 
whole or in part, in any form (except by reviewers for the 
public press), without written permission from the publishers. 



Preface 

By “The Folklore of Capitalism” I mean those ideas 
about social organizations which are not regarded as 
folklore but accepted as fundamental principles of law 
and economics. This book is an application to a broader 
field of the same point of view represented in my former 
book, “The Symbols of Government.” It continues from 
where that book left off, but since “The Folklore of 
Capitalism” must stand by itself, it has been necessary 
to repeat in the first chapters many of the observations 
which have already been made in “The Symbols of Gov- 
ernment.” I have tried, however, to avoid undue repeti- 
tion by using different illustrative material. 

I wish to acknowledge my indebtedness to H. L. 
Mencken, Sir Willmott Lewis, E. Wight Bakke, Dean 
Acheson, Roger Foster, Miss Charlotte Wilder, and 
Eugene Davidson, who read all or portions of the manu- 
script while it was in preparation. I also wish to thank 
Miss Marie Louise Resweber for her careful work in the 
preparation of the manuscript copy. 




Contents 


I . The Systems of Government and the Think- 

ing Man I 

In which it is explained how the thinking man, without 
whom there would be no group free will in modern so- 
ciety, after learning the proper lessons of history chooses 
wisely between Capitalism, Communism, and Fascism — 
provided always he doesn't let emotion sway his reason 
or listen to the blandishments of demagogues. 

II . The Psychology of Social Institutions , . . 2I 

In which is portrayed the hierarchy of divinities in Ameri- 
can industrial society, whose leadership and inspiration 
affect our business, charitable, and educational organiza- 
tions, both great and small. 

III. The Folklore of 1937 46 

In which it is explained how the great sciences of law and 
economics and the little imaginary people who are sup- 
posed to be guided by these sciences affect the daily lives of 
those who make, distribute, and consume our goods. 

IV. The Place of Learning in the Distribution of 

Goods 83 

In which it is shown how the scholar, seeking for universal 
truth in the light of reason, guides the stumbling feet of a 
great modern democracy, and in which the never-ending 
battle of these learned men against unsound theories and 
the selfish greed of politicians is also discussed. 

V. The Use of the Language of Private Property 

To Describe an Industrial Army . . , . 118 

In which the inconvenience and discomfort of using an 
ancient language in public discourse are pointed out. 

VI. A Platform for an Observer of Government . 136 

In which it is suggested that since men arc compelled to 



vi The Fol klore of Capitalism 

personify their institutions, the point of view of the psy- 
chologist toward such personifications may offer a useful 
platform for studying social problems. 

VII. The Traps Which Lie in Definitions and 

Polar Words 165 

In which we digress for a moment to explain how difficult 
it is to describe a culture of which you are a part and to 
point out the traps which lie in polar words. 

VIII. The Personification of Corporation . . . 185 

In which it is explained how great organizations can be 
treated as individuals, and the curious ceremonies which 
attend this way of thinking. 

IX. The Effect of the Antitrust Laws in Encour- 

aging Large Combinations 207 

In which it is shown how the antitrust laws enabled men 
to look at a highly organized and centralized industrial or- 
ganization and still believe that it was composed of indi- 
viduals engaged in buying and selling in a free market. 

X. The Ritual of Corporate Reorganization . . 230 

In which is explained the doctrine of vicarious atonement 
through which the debts of an industrial organization arc 
forgiven. 

XL The Benevolence of Taxation by Private Or- 
ganization 263 

In which it is shown how taxation by industrial organiza- 
tions is a pleasanter way of paying tribute than ta^^ation 
by government. 

XII. The Malevolence of Taxation by the Govern- 
ment 31 1 

In which is discussed the curious myth that permanent 
public improvements, conservation of resources, utilization 
of idle labor, and distribution of available goods are a 
burden on posterity if accomplished by an organization 
called ‘‘government” which assumes public responsibility. 



Contents vii 

XIII. The Social Philosophy of Tomorrow . . . 332 

In which the author plays safe and refuses to be specific. 

XIV. Some Principles of Political Dynamics . . 347 

In which a science about law and economics is distin- 
guished from a science of law and economics. 

Index 395 




THE FOLKLORE OF CAPITALISM 


CHAPTER I 


The Systems of Government and the 
Thinking Man 

In which It is expklned how the thinking Jiatt, Without whom 
there would be no group free will in modern society, after learn- 
ing the proper lessons of history chooses wisely between Capi- 
talism, Communism, and Fascism — provided always he doesn’t 

or listen to the blandishments of 


let emotion sway his reason 
demagogues. 


D uring the 1936 campaign Stuart Chase wrote a 
I book called Rich Land, Poor Land, in which he 
dramatized with brilliant persuasiveness the ap- 
palling waste of irreplaceable fertile soil. No one seemed to 
doubt that the statements were true or that the situation was 
serious. Did the political candidates make a major issue of 
what they were going to do to remedy this evil? They did 
not. The proposal of a practical plan might have been ruinous 
to either party. 

The wastage of other resources had been apparent for a 
long time. It had been studied in a report of the National 
Resources Board, which hinted at plans of control. Did any 
political candidate dare talk about those plans before the pub- 
lic? Of course not. It was better to talk abstractions about 
“the American way.” This, of course, did not apply to can- 
didates who had no hope of being elected, like Norman 
Thomas. It did apply to those who were seriously seeking to 
form a government. 

The wastage of human labor was so obvious that it needed 
no report to bring it to public attention. Yet plans for the 



2 The Folklore of Capitalism 

Utilization of this labor to stop the waste of resources were 
the most avoided of all political issues. 

The reason for all this was that men did not want to be 
branded as Communists, or Fascists, or bureaucrats, or advo- 
cates of ruinous spending, or as opponents of the Constitu- 
tion on the one hand and the capitalistic system on the other. 
Capitalism, Communism, and Fascism were the greatest 
political realities among people, none of whom could give an 
intelligible account of any of these “systems.” 

The Eternal Debate about Systems of Government 

But why should the solution of these plans involve the call- 
ing of such names? The answer lies in the psychology which 
always attends the struggle of a new type of organization to 
obt^m^an accepted place in the folklore of the times, which 
today is called “law” and “economics.” 

In order to solve the pressing problems of waste of labor 
and national resources, new organizations were sorely 
needed; yet there was no logicaLplace in the mythology of 
government to which they could be assigned. The social 
needs were felt by everyone, but the slogans which the new 
organizations used had a queer sound. Therefore, the spirit 
of the Constitution, the traditional symbols of economics, 
and the general picture of a “rule of law” as opposed to 
“bureaucratic control” were all arrayed against them. 

This phenomenon always occurs whenever new types of 

sociaLotgBiDii^ia^ 

an older ord^r. A merc hant cla ss, slowly rTsmgTd power 
after the Middle Ages, had no place of prestige in the social 
hierarchy. Therefore, when the neqd for ban king and credit 
began to be felt, only the despised ][ew^5jcapney lenders 
could filijt. Society tolerated felt compelled to 

establish the fact that such techniques were unworthy by 



Government and the Thin\in^ Man 3 

laws of the Church declaring them illegal and immoral. 
Today there is great pressure on the Government to take 
over the techniques of Bankers/ cor- 
porations, to use government credit to promote the distribu- 
tion"^f goods arfeankefs and even difectry to 

distribute the goodr themselves. Such new activities, of 
course, meet the same kind of theological opposition as met 
the growth of private banking in the MiddR Ages. They arc 
immoral; they will cause the ruin of national character; they 
will break up the home; they will destroy freedom. There is 
no reason to be alarmed or irritated with such opposition. It 
is only necessary to understand why it is inevitable. 

It may be asserted as a principle oITiuman”jQfganiz^ 
that when newi^pes^oLspcia/ required, re- 

spectable, well-thought-of, and conservative peoplp.^aie un- 
able to take partTnJl^^^ Their mbfal and economic preju- 
dices, their desire for the approval of other members of the 
group, compel them to oppose any form of organization 
which does not fit into the picture of society as they have 
known it in the past. This principle is on the one hand the 
balance wheel brsbcial organization and on the other hand 
its greatest eTemanit of rigidity.^ 

A failure to understand this is responsible for all the non- 
sense which intelligent, scholarly persons always write about 
contemporary revolutions of any kind. This nonsense, how- 
ever, occurs with such regularity that it should be regarded 
as one of the fundamental factors in j^crakpiSychology rather 
than nonsense. Its pattern is always tfiie same, though the 
words may be different, \\niat wa^caTje^^ 
die Ages i^ cjikiQopamunism today, but the essential ide- 
ology of the argumentativeaj^k, then and now, is identical. 
Thclrc actio ns to the French Revolution and to the modern 
German, Russian, or Italian revolutions differ only in that 
the vocabularies are different. 



4 The Foll^lore of Capitalism 

Law and morals and economics arc always arrayed against 
new groups which are struggling to obtain a place in an in- 
stitutional hierarch,y..Qf prestige. The violence of the combat 
depen^oiTthe extent of the departure from the older ways 
of doing things. When John D. Rockefeller built an empire 
in a world which was supposed to be composed of competing 
individuals, he violated the mythology and folklore which 
pictured what the great businessman was supposed to do. In 
the same way, John L. Lewis, with his sit-down strike, vio- 
lated the ideals of what respectable labor leaders should do. 
Had Rockefeller and Lewis followed current scrupleS;, they 
would hot have huilt their great organizations. The reason is, 
of course", that such scruples were the products of a time 
which did not recognize the necessity, or even the legality, of 
such organizations as Rockefeller and Lewis were trying to 
formT^*' 

The departure of John D. Rockefeller’s organization from 
established ideals was not great, and hence the moral revul- 
sion was confined to the extreme liberals. It resulted only in 
the “muckraking era.” Today, however, the new organiza- 
tions growii^ to fill ga ps in a highly organized society vio- 
late current notions of the structure of government in a riiuch 
more dramatic way. Hence the spiritual conflict is much 
more marked. The difference between the violations of cur- 
rent 'folklore in the rise of the Standard Oil and those in the 
present growing participation of government in the distribu- 
tion of goods is the difference between venial sin and out- 
right heresy. 

All arguments against heresy follow the same pattern. A 
Devil must first be discovered who is trying to lead the 
people astray. A Hell must be invented which illustrates 
what happens to those who listen to the Devil. The concep- 
tion of free will is essential. Then the age-old story is told. 



Government and the Thinking Man 5 

Russia and Germany listened to the Devil. They are there- 
fore in Hell. 

In our rational and sophisticated age the Devil and the 
Hell become very complicated. The true faith is Capitalism. 
Its priests are lawyers and economists. The Devil consists of 
an abstract man called a demagogue. He is the kind of per- 
son who refuses to be moved by sound economists and law- 
yers and who is constantly misleading the people by making 
the worse appear the better reason. 

Group Free Will and the Thinking Man 

It is impossible to conduct public debate on political or eco- 
nomic questions today without assuming some sort of group 
free will. Without this assumption moral judgments about 
nations or institutions which refuse to follow the right eco- 
nomic principles would be impossible. People insist that such 
judgments be made and in order to make them two things 
are necessary : first, a set of ^indples to use aj^a stai'dard and, 
second, the conception of group free will in order to assess 
blame against thosTwho refuse to follow those principles. 
Therefore an abstract man is created who has the ability to 
understand sound principles aad the, free will,, 

All public debate is supposed to be addressed to him. 

This abstract man is usually called the ‘‘Thinking Maal’ 
because today rational thought is the way of economic and 
legal salvation. In earlier times when faith was thoughtjo 
be better jthan reason, the men who Feafod God were at the 
receiving end of public exhortation. It was the doubters who 
created the breeding ground for heresy. Today^in an age of 
reason, the doubters are not considered dangerousTft isTThe 
unthinking man or the uneducated who are led astray by 
unsound principles such as Communism or Fascism, which 
are the modern equivalent of heresy. 



6 The Fol\lore of Capitalism 

This conception of a group of thinking men in society to 
whom rational appeals can be made, who are willing to ac- 
cept right principles when they are logically explained, is 
much like the former ethical notion of individual free will 
which used to be applied in the treatment of maladjusted j^r- 
sonalities. In the naive psychology of the past “Free Will” 
was alittle man in the top of one’s head who caught bad im- 
pulses and suppressed them. He did this by asking the ad- 
vice of another little man called “Reason.” In order to listen 
to Reason, however, it was necessary for Free Will to dismiss 
from the conference a third little man called “Emotion,” who 
had a tendency to obscure the clear advice of Reason. 

Today no competent psychologist talks that way about the 
habits and conduct of the individual. However, these con- 
ceptions are still necessary for political, economic, and legal 
discussion. To understand the debate about Communism, 
Capitalism, and Fascism, it is necessary to analyze the 
ThinkmgMan,” who is essential to our nodqn cf group 
freejm!LHe*is a most interesting fellow, because heTs the 
person who is supposed to choqse_the system of government 
for America. 

LcTus briefly describe him. He is the fellow we might all 
become if the demagogues vJould only let us alone. He is the 
gentleman who acccpts sound and rejects unsound principles. 
He does not sit upon the interpretation of the laws of the 
nation, because that requires the pecijfliar and 
soningof the law. Here we must call on the sound jurist, who 
is in constant combat with unsound jurists. It is the duty, 
however, of the thinking man to distinguish between sound 
and unsound jurists and follow the former. In the field of 
sociology and economics, however, the thinking man sits on 
matters of principle in his own right. He chooses the reason- 
ing of the Brookings Institution and throws out of the win- 
dow the unsound theories of General Hugh Johnson. He 



Government and the T hinging Man 7 

may be misled for a short while, but in the long run he is hard 
to fool. He hates superficial reasoning and quack remedies. 
He is imbued with the pioneer spirit of Americ^He knows 
that we must balance the budget. His duty is to warn against 
impending doom, so that if unsound theories are followed he 
will be able to say that it was not his fault. He never sacrifices 
principle for expediency. Our colleges are deypted to 
taslc df tfaining^ It is through the study of things like 
Latin and Greek that he develops the mentaLmuscles which 
enable him to understand complicated theories. He knows 
the lessons of history and folloj^j^s them. He distrusts politi- 
cians and seeslErough their wiles. It is to him that genuine 
statesmen appeal. (Genuine statesmen, of course, do nnt 
stoop to stir up the emotions of the mob.) Therefore, Mr. 
HeafiSt, Mr. Landon, Mr. Roosevelt, the Chicago Tribune, 
the New Republic, the Saturday Evening Post, Mr. Norman 
Thomas, John W. Davis, and Earl Browder all address their 
remarks to the thinkingjman. Of course, only the sound per- 
sons or publications named above really address their re- 
marks to the thinking man. The unsound ones are stirring 
up the emotions of the mob misrepresentation and dema- 
goguery and are just pretending to address the thinking man. 
The thinking man is supposed to see through all of that and 
make the proper selection from the above list. 

Education J3ciak€« more, A free press^guides 

them. Unlimited public djscussion aids them in coming to 
thetf unemotional and unbiased decisiprisV ^ 

Without tJie almos universal acceptance of this concept 
of the “thinking man,” the debate about the merits of Capu 
talism v. Fascism would be impossible. The whole rational 
structure of this debate depends on group free will to choose 
a “systei^of government” based on this ^stract Individual. 
In the old dSiates on heresy the abstracFman in the back- 
ground was the “be lieve r.” Today, of course, we consider our- 



8 The Folklore of Capitalism 

selves too rational to rely too much on the believer. Beliefs 
and faiths afe all right in a democracy only after v^e have first 
thought them out or hired someone to think them out for us, 
The Middle Ages, we think, were very wrong in relying so 
much on ceremony. Protestants often point* out that this is a 
weakness of the Catholic Church. The capitalistic system is 
not supposed to Be founded on faith but on reason. The 
thinking man analyzes it and then accepts it by observing 
the greater dangers which follow acceptance of other systems. 
The process is something like this. Germany was confronted 
with a choice between the right principles of government and 
the wrong. It chose the wrong ones, because people were 
misled by demagogues. Once the wrong ones were chosen, 
the persecution of the Jews automatically followed. This 
should have been clear to the thinking men of Germany, but 
either there were not enough of them in Germany or else the 
German thinking man was not particularly bright about gov- 
ernment. The thinking men of America see this very clearly 
and warn people about the dangers which follow the accept- 
ance of these foreign principles. On the other side, we find 
people in Germany and Russia talking in the same way about 
America and England. Russian propaganda in this country 
is based on the notion that thinking men can be educated in 
capitalistic countries. 

The above is a description of a prevailing point of view. 
It is not a recommendation for reform, because it is a point of 
view which in daily life cannot be escaped. It is essential that 
the individual feel that he has frejELwill and reason, as separate 
qualities, in order to conduct his affairs with dignity and 
force. It is equally necessary that he have that same feeling 
toward the institutions to which he is loyal. All the cere- 
monies of daily life are set in the confines of that stage. How- 
ever, for purposes of diagnosis or dissection of social institu- 
tions, it is necessary to realize that what we call free will, and 



Government and the T hinging Man 9 

sin, and emotion, and reason, are attittides which influence 
conduct and not separate little universes containing princi- 
ples which actually control institutions. The world from the 
point of view of reason and free will may be compared to a 
highly idealized portrait of an individual which flatters him 
and makes him proud. It is useful to hang on the wall. It is 
entirely useless as a basis for diagnosis or prescription if the 
individual happens to be ill. The separate utility of these two 
points of view is seldom recognized in political or economic 
thinking. We are still convinced that appeals to the thinking 
man to choose his system of government are not ceremonies 
but actual methods of social control. We still use govern- 
mental creeds as a basis for diagnosis. 

This almost universal point of view effectually prevents 
men from observing the complex series of events either in 
their own or in foreign countries. Having adopted a creed, 
they use the most convenient disagreeable incidents occur- 
ring in countries with different creeds to demonstrate the 
truth of their own creed. Therefore, the creeds of those na- 
tions where centralized governmental organization is operat- 
ing with the most violence become the most potent political 
weapons against exercise of national power to solve national 
problems in America. It is for this reason that Sweden does 
not give us a good parallel for political debate in America. 
It is difficult to describe that country in simple abstract terms. 
Germany, Russia, and Italy are much more convenient for 
argumentative purposes because their misfortunes can be laid 
to the fact that their creeds contradict our own established 
principles. 

The creeds of these countries, of course, do not describe or 
explain the events taking place there, any more than the Booh 
of Mormon describes the actual development of the Mormon 
Church. They simply furnish the Devil and the Hell which 
are supposed to follow a departure from our own settled prin- 



10 The FolJ^lore of Capitalism 

ciples. The lessons of history are used in the same way. Men 
do not actually search history to avoid the mistakes of the 
past. They seek convenie nt a nalogies to show the dangers in 
failing to adopt the creed which they advocate. The legal or 
economic prophet of today sincerely believes that he is using 
a process of analysis and reason to help the thinking man in 
a voluntary choice of a political or economic creed. 

But how do men actually choose these creeds? The answer 
is that they do not choose them. Men become bound by loyal- 
ties and enthusiasms to existing organizations. If they are 
successful in obtaining prestige and security from these or- 
ganizations, they come to regard them as the ultimate in 
spiritual and moral perfection. This attitude is necessary for 
the morale of these institutions. When a time comes that these 
old organizations fail to function, new organizations struggle 
to fill the need. The practical need for them must be plain or 
they would not make any headway. Yet they can have no 
slogans, traditions, or creeds, because they are so new. For 
example, it was obviously necessary to form a governmental 
organization to feed people during the depression. There was 
no place in our creed for anything other than charity. There- 
fore, the feeding of those in need by the Government violated 
that creed. Distribution of goods to unemployed who hap- 
pened to possess no stocks or bonds had not as yet developed 
a creed of its own. Hence the dole was supposed to lead to 
the destructmn of individual initiative, the ruin of national 
character, and the downfall of Capitalism. Communism in 
Russia became the favorite parable against the Government’s 
accepting the obligation to distribute available goods, be- 
cause Russia was a country in which government had as- 
sumed that obligation and which also had lots of internal 
difficulties. Had Russia been more prosperous, some other 
country would have been used as a parable. 

A beautiful example of this automatic religious opposition 



Government and the Thinking Man ii 

to new forms of organization is found in the controversy be- 
tween the Supreme Court and Roosevelt. The Court had 
been confusing and delaying every exercise of national power 
to solve national problems. It was paralyzing new adminis- 
trative organizations of the Government by its attitude of 
ho stili ty. In this way it gave great spiritual comfort to those 
who feared the exercise of national power to solve national 
problems. It enabled them to attack these new government 
activities from a mystical point of view and thus to avoid dis- 
cussing the unpleasant facts which made these new activities! 
necessary. 

When the Government sought to free itself from the mysti- 
cal domination of the Court, all practical discussion was 
drowned in predictions of moral catastrophe. Intelligent lead- 
ers of the American Bar reacted automatically to the spiritual 
conflict and indulged in the stereotyped pattern of debate 
which we have been describing without any realization that 
it was stereotyped. 

In this atmosphere, for those who were seeking rational 
grounds to express their distrust of new forms of social or- 
ganization, Communism and Fascism came to be political 
realities in this country. They were imported by newspapers 
like the Hearst chain and magazines like the Saturday live- 
ning Post which constantly preached the dangers of changing 
our system of government. It was through such sources that 
these magic words got their greatest advertising and their 
widest currency. It was from our great institutions of learn- 
ing that such prophets of disaster got their scholarly support. 
Parables were needed to dramatize for conservative Ameri- 
can people their phobias against change. “Bureaucracy” and 
“regimentation” were entirely too vague without concrete ex- 
amples. The parables of the wild Russian and the cruel Ger- 
man were admirably adapted for use as bogeymen. It was in 
this way that the notions of Communism and Fascism 



12 The Folklore of Capitalism 

spread. In this way men In the United States became vitally 
interested in competing “systems” of government. 

In Sweden, by way of contrast, new organizations to fill the 
same needs did not encounter such violent priestly opposi- 
tion. Why it was that Swedes were able to accept the comforts 
of government-subsidized houses without worrying over the 
totalitarian state and the abolition of individualism is a com- 
plicated study in national jisychology. One answer is that 
Sweden was sufficiently practical in its outlook to avoid this 
conflict. Therefore, the issues of Capitalism, Communism, 
and Fascism did not become important political realities in 
Sweden. Neither did they achieve such overshadowing Im- 
portance in England. England, by electing a Socialist, dis- 
covered how little difference allegiance to a formal “system” 
of government made. They found him more conservative in 
action than the Tories. 

The Conflict between Capitalism and Foreign Systems 
of Government 

In this country, since it was particularly devoted to rational 
principle, the attempt of new organizations to rise In re- 
sponse to vital needs gave rise to a holy war between the great 
fundamental principles of gopd and evil. This was the 
“fault” of no one. It simply illustrated the inevitable working 
of a lajv of political dynamics. When a new organization at- 
tempts to rise in an atmosphere of religious devotion to a 
governmental mythology, it cannot succeed without the de- 
velopment of a set of principles and a mythology all its own. 
The emergence of this new set of principles and mythology 
cannot be accomplished without some sort of holy war, the 
violence of which depends on the hj.blts and culture of the 
people. 

~As we have said before, the creeds of Communism and 



Government and the Thinhjng Man 13 

Fascism were no more descriptive of what was happening in 
Russia or Germany than the current economic creeds were 
descriptive of what was happening here. Nor was their con- 
tent important, because no one who used the creeds’ words 
in public debate knew anything about their content. It was 
only important that these words could be used to surround 
new organizations in America with a vague atmosphere of 
disorder. Revolutions serve to emphasize very vague ideas 
and make them appear to have a specific content. Both the 
Russian and the German revolutions pictured the State in a 
new relation to other social organizations. These revolutions 
advanced that idea by focusing attention on the actual possi- 
bility of its practical realization. Yet at the same time they 
retarded the acceptance of enlarged state activity by creating 
new phobias of violence and suppression. This is important 
to remember because of the generally accepted notion that 
revolutions advance new ideas. What they actually do is to 
give morale and organization to radical individuals. This 
may or may not advance the new idea. Too often it creates a 
conflict in which even familiar progressive ideas appear to 
ha^ a radical tinge. 

Thus Communism and Fascism in this country gave im- 
petus to radical organizations and at the same time made 
familiar humanitarian ideals look violent by coordinating 
them with events in violent and disorderly countries. The re- 
sulting conflict caused respectable people to oppose humani- 
tarian ideals for fear of being identified with the radical 
organizations which advocated them under these strange 
names. The underlying philosophy of both Communism and 
Fascism was familiar enough in this country. It had been 
identified with a dissenting but nevertheless respectable 
group. Norman Thomas was not regarded as dangerous. He 
preached Christian ethics in government in a perfectly re- 
spectable way. At no time did he appear to offer the possi- 



14 T he Folklore of Capitalism 

bility of putting these ideals into practice. Therefore, he was 
never hated the way that Roosevelt was hated. He was never 
identified with an organization that seemed about to do any- 
thing practical. Here was the kind of Socialist that a decent 
Socialist was supposed to be— for whom romantic college 
professors could vote. He symbolized a conflicting ideal with- 
out creating a practical working institution which interfered 
with any of the ideals that Socialism contradicted. Thus con- 
servatives liked to have him around, just as respectable mar- 
ried people of the Victorian age liked to read about Lancelot 
and Guinevere and admired Tennyson for writing the Idylls 
of the King, This is what a friend of mine meant when he 
said Norman Thomas made him “think.” 

The rise of actual institutions to accomplish a few of these 
ideas, however, threw them completely out of focus. It was 
as if Lancelot and Guinevere had suddenly appeared to con- 
duct their affair next door to Mr. Tennyson (who would 
have been one of the very first to move out of the neighbor- 
hood). Conflicting ideals, respected in their place, become 
disquieting when they appear in the wrong role. If the func- 
tion of the political or economic or legal creed as a ceremony 
is understood, this phenomenon will appear entirely normal. 
There are certain dramatic rules to be observed or the show 
is spoiled. No rage is equal to the rage of a contented right- 
thinkingman when he is confronted in the market place by 
an idea which belongs in the pulpit; and this is as true of 
organizations as it is of individu^s. 

And thus the holy war between Capitalism, Communism, 
and Fascism is one of the greatest obstacles to practical treat- 
ment of the actual day-to-day needs of the American people. 
Even agricultural credit and soil conservation become tainted 
with Communism. All sorts of sensible suggestions are 
drowned in the din of battle. It is a fixed idea that any society 
has a free-will choice to make between these systems Caoi- 



Government and the T hinhjng Man 15 

talism is a good system, in which the individual has fr^dom 
CommunisM afid Fascism destroy the freedom of the indi 
vidi^l. The whole political campaign of i93ff cohsisted in 
ringing the changes on these naive ideas. Every^ractical 
scheme for social betterment had to be tested for tendencies 
leading to one or the other of these systems. If it led to Com- 
munism or Fascism, it was thought better to humiliate the 
unemployed or to waste natural resources rather than take 
steps which would change the “capitalistic system.” 

To this way of thinking about government may be attrib- 
uted the failure of such schemes as governmental housing 
and the control of agriculture. Waste and want were present 
on a large scale in a land of plenty. Yet people with no con- 
ceivable material interest at stake preferred that they con- 
tinue because the practical steps to alleviate them led to an- 
other system of government. Coupled with this naive belief 
that Germany and Russia had actually chosen the erroneous 
political theories that now threatened America was an aston- 
ishing ignorance as to just how the changes in Germany and 
Russia had come about and how the present governments in 
those countries operate. For a long time our editorial writers 
solemnly proved that these governments could not survive, 
because they were flouting every sound political principle. 
When their survival began to be recognized as an accom- 
plished fact, these same editorial writers were equally con- 
vinced that America was about to become like Germany on 
the one hand, or Russia on the other, and to imitate both 
their culture and their institutions. It was thought that the 
safest insurance against such terrors consisted in stripping 
the Federal Government of all power of social control. 

The Search for Universal Truth in a Political World 

We can better understand this way of thinking if we com- 
pare it to the splittinff ud of the Roman Church durinc^ the 



i6 The Fol\lor€ of Capitalism 

Reformation into creeds and sects which mutually distrusted 
and leared each other. Each creed was thought by its fol- 
lowers to be the only way of salvation. Yet the supporters of 
each creed were in constant terror that their own sect might 
be seduced by the ideas of the others. There followed a con- 
stant series of petty persecutions and crusades, accompanied 
by an extraordinary literature of learned disputation, so simi- 
lar to editorials of various kinds today as to leave no doubt of 
the character of the phenomena. None but the very learned 
men could readily explain the actual difference between the 
creeds, just as none but learned men can write economic 
theology today. It was enough for the ordinary men to devote 
their efforts to defending the faith. The essence of the faith 
was that we must undergo present inconvenience to save our 
souls for the future. That was hard, but worth-while. The 
present was transitory. Hell was the wage of violating the 
taboos of the rn^ieval church. Inflation and dictatorship are 
the wages of governmental control of natural resources 
today. 

The idea that a church could be judged by its effectiveness 
as an organization had not appeared above the horizon. It 
was supposed that the specific provisions of its creed made it 
a good or a bad church, because if the creed was right, tem- 
porary deficiencies would be bound to disappear. The public 
declarations of the church as to matters of belief were thought 
to be most important contributions to society. The real ob- 
ject of the church was neither charity nor any form of social 
work but the unremitting search for universal truth. 

Today the attitude of the church has so changed that its 
function as a seeker for universal truth is more a part of its 
formal ritual than its vital ideal. For most people the stand- 
ard by which churches ai^udged is their effectiveness as a 
social agency among the people with whom they work. This 
is evidenced by a complete change in attitude toward the 



Government and the Thin\ing Man 17 

functions of the missionary. Medical attention to under- 
privileged groups, or even to the heathen, is now thought of 
far more importance than the holding of services. 

This has not yet happened to our political religion, which 
is the most vital religion of today in that it is the only one 
for which men are willing to persecute their fellows and to 
lead crusades. 

Back of the ascendancy of creeds and the complete sub- 
ordination of practical consideration is the notion that states- 
men today, like the priests of the Reformation, must devote 
themselves, with the aid of scholars, to discovering princi- 
ples of universal truth. This is an idea shared by Hitler, 
Hearst, newspaper columnists, and great scholars cloistered 
in universities. We cite as an example the well-known col- 
umnist Dorothy Thompson, commenting on a scholarly dis- 
sertation at the Harvard Tercentenary: 

Prof. Gilson comes from Europe and he spoke with the feeling 
and apprehension of one who lives in the midst of a revolution 
which threatens to sweep away the very basis of the civilization 
in which we live. In his speech he made perfeedy clear what that 
basis is. Its foundation is the belief that there is a spiritual order 
of reality, “whose absolute right it is to judge even the state, and 
eventually to free us from its oppression.” 

He said: “The conviction that there is nothing in the world 
above universal truth lies at the very root of our merual and socM 
liberty.” If it goes, he warned, there will be nothing to protect 
us against the worst kind of slavery to which mankind is now 
being submitted by totalitarian states — mental slavery. 

In very different words, Prof. Gilson echoed the thoughts 
which were expressed some weeks ago in the epistle of the dissi- 
dent Protestant clergy in Germany. Such ideas also lay behind 
the refusal of Oxford and Cambridge Universities to participate 
in the quincentennial celebration at the University of Heidelberg 
this year. They are the conceptions that truth, morality, sqdal 
justice and beauty are necessary and universal in then ^ 



i8 The Folklore of Capitalism 

They cannot be true alone for a certain social organization and 
economic system, or for a certain nation or for a certain race. 
Their validity must be universal. (New Yor\ Herald Tribune, 
September 5, 1936.) ^ 

Some of the eminent scholars thought that a supreme court 
of learning might be a help. This notion is illustrated by a 
report of the proceedings in the New Yor\ Times. 

It is belief in the universality of truth, the conference was told, 
that gave the church its supreme and unquestioned moral au- 
thority for centuries during the Middle Ages. 

This moral authority was sifted down to the masses of the 
people throughout the Western world from a fountainhelid at 
the University of Paris, which gathered together all the leading 
intellects of the day, regardless of nationality, in a universal fel- 
lowship of truth-seekers. 

It now behooves the present-day universities, particularly those 
in the United States, the scholars are convinced, to assume a role 
in this era similar to that played by the University of Paris. 

It was this moral authority of the medieval church, it was 
pointed out further, that became a power so great that the tem- 
poral rulers did not dare disobey it. 

The time has come for the learned men of the world, many of 
the present-day scholars believe, to recognize their supreme re- 
sponsibility and to take the initiative in an effort to re-establish 
a universal moral authority, based on the tenets of universal truth 
as concefved By the collective wisdom of each generation. 

A permanent body of organized intelligence, under the leader- 
ship of American universities, because of the world’s respect for 
the unbiased and objective wisdom of its members, would exert 
such a profound influence upon the nations, the scholars believe, 
that the force of its moral authority would be similar to the moral 
authority of the medieval church. 


The general questions submitted were: 



Government and the Thinking Man 19 

1. Do you believe that a supreme court of organized knowl- 
edge for the intelligen^uidance_p£ can b^cvclopcd? 

2. Can the organized scholarship of the world makeTts 3 f felt 
as a power in the world ? 

3. How sKall a beginning be made of achieving this desirable 
end? 

The specific questions were: 

1. What do you consider the principal points of potential im- 
portance to the world that might come from the Harvard Ter- 
centenary Conference of Arts and Sciences? 

2. Could the conference be described as a temporary supreme 
court of learning, a court for a week? 


7. Might the opinions emanating from such a group gain suffi- 
cient prestige so that States as well as individuals and economic 
systems would listen to them? {New Yor\ Times, September 14, 

It is very significant of the, unconscious attitudes toward 
government that this particular symbol was chosen to repre- 
sent the study of government. The Supreme Court, above all 
institutions, stood for the finality of rational principles. In the 
Middle Ages the University of Paris was actually a supreme 
court of social principles and judged both law and meiJicine. 
It was this University which, in its search for universal truth, 
placed its ban on quinine as a cure for fever. Today when 
the world’s scholars sought an organization to represent the 
search for universal truth their minds instinctively seized on 
the symbol of a court, which for us represents the final au- 
thoritative solution of rational and scholarly debate. 

This search for truth, instead of convenience, placed the 
emphasis on principles rather than on organizations every- 
where but in business and politics. Nobody wanted a su- 
preme court of business policy to tell Henry Ford and Gen- 
eral Motors what to do to sell cars. No one suggested a 



20 T he Foll^lore of Capitalism 

supreme court of political strategy. Those things belonged to 
the temporal world of affairs, the day-to-day needs of the 
people — which matters the scholars gladly rendered unto 
Caesar, as true priests have done from time immemorial. 
Unless they did this it is hard to see how the great game of 
scholarship could go on. One does not speak of a. successful 
trial lawyer as a great scholar of the law — one does not speak 
of successful political strategy as statesmanship. 

Of course, there were many among these scholars with 
exacdy the same point of view as the writer’s. Yet when the 
subject of organization was approached, they could do noth- 
ing but follow the attitudes of their time. Men — even learned 
men — cannot “think up” forms of successful organization. 
Had the writer been fortunate enough to have been num- 
bered among these learned men, he, too, would have voted 
for a supreme court of learning. 

It was in this atmosphere of a search for universal truths 
that “systems” of government achieved such paramount im- 
portance — that practical schemes were judged by their tend- 
encies rather than their immediate effect on health and com- 
fort. Learned men were not interested in bequeathing a 
physical plant to posterity. They were solely concerned with 
dictating the social_grganization of the future. In this they 
acted as learned men have always acted. Each age tries to 
dictate the social philosophy of posterity — and in the long 
run alwavs fails. 



CHAPTER II 


Hhe Psychology of Social Institutions 

In which is portrayed the hierarchy of divinities in American in- 
dustrial society, whose leadership and inspiration affect our busi- 
ness, charitable, and educational organizations, both great and 
small. 

T he preceding chapter is only an introduction to an 
analysis of the part that creeds play in social organi- 
zation. Its purpose is to show that wherever men 
become absorbed in a medieval search for the magic formula 
of universal truth the creeds of government grow in impor- 
tance and the practical activities of government are mis- 
managed. Holy wars are fought, orators and priests thrive, 
but technicians perish. Color and romance abound in such 
an era, as in all times of conflict, but practical distribution of 
available comfort and efficient organization is impossible. 

When we attempt to analyze the actual operation of creeds 
in society, we discover the surprising fact that their content 
and their logic are the least important things about them. 
Socialists, thrown into power against a background of con- 
fusion, become more conservative than Tories. On the other 
hand, whoever obtains power in times of national humilia- 
tion and defeat is apt to express and intensify the persecution 
manias which that atmosphere develops in any people. This 
happened in Russia and Germany. It was not the result of 
the doctrines of Communism or Fascism. It would have oc- 
curred under any doctrine. Only those leaders who can re- 
spond to current aspirations and ideals can survive. There- 
fore, any governmental creed that is professed by actual 
leaders must change to fit the emotional needs of their people. 



22 


The Folklore of Capitalism 

The theoretical systems of government are only argumenta- 
tive tools by which priests and scholars condemn heresy or 
else attack the established Church. 

Back of every creed is a hierarchy of heroes or divinities 
whose imaginary personalities give meaning to those words. 
Without an emotional understanding of this hierarchy we 
cannot even guess the meaning the words will finally take, 
any more than those who wrote the due process clause in the 
Constitution, intending to give protection to those unjustly 
accused of crimes, could have guessed that it would be the 
principal protection of public utilities against public service 
regulation. 

The study of the actual operation of the social creeds which 
give logical form and unity to our so-called systems of gov- 
ernment is confused by the fact that it is hard for us not to 
think of them as guiding principles which we choose or re- 
ject. For example, a recent book, In Defense of Capitalism, by 
James H. R. Cromwell and Hugo E. Czerwonky, carries this 
statement on the jacket, which not only represents the atti- 
tude of the authors but also that of most conservative people 
today: 

The insecurity and degradation of the American working masses 
is attributable, not to capitalism, but to ignorance concerning its 
functioning. The fact is that capitalism is anldcal which jicver 
has been achieved. Before discarding capitalism and economic 
freedom for a system of regimentation and rationing, we contend 
that the defects of our monetary organization should first be 
remedied and capitalism thereby given a fair chance to show 
what it can do. 

In other words, from this point of view Capitalism is studied 
apart from the living organizations which profess it as a 
creed. If it is found to be good our troubles must come from 
a sinful refusal to follow Capitalism logkally. If it is found 



T he Psychology of Social Institutions 23 

to be bad our troubles are the result of not voluntarily aban- 
doning it. 

Such a point of view makes it impossible to observe how 
creeds actually operate in the world of temporal affairs. It 
leads only to pounding the table and preaching the evils of 
sin. This chapter will therefore be based on the assumption 
that social creeds, law, economics, and so on have no mean- 
ing whatever apart from the organization to which they are 
attached. To say that the organizations voluntarily choose 
them is as meaningless as to say that the Catholic Church 
voluntarily chose the Catholic religion in preference to Prot- 
estantism. To blame organizations for not living up to them 
is as meaningless as blaming feudal barons for not living up 
to the precepts of chivalry. Books like In Defense of Capital- 
ism, from which we have just quoted, are an automatic re- 
sponse to an emotional conflict. They are not an explanation 
of the creed; they are part of it. In order to understand this 
we must discuss the psychology of social institutions which 
produces similar results regardless of the form into which the 
statement of the creed is cast. 

Social Organizations, Large and Small, Li\e Crystals, 
Pattern Themselves after the Same Form 

The social organization of a nation is the unifying force 
which bindsji peopl e toge ther. It is a complex thing based on 
habit and acceptapee of certain cornnri on v alues. It creates an 
atmosphere in whichTHousands of smaller organizations 
with opposing interests succeed in getting along together. It 
does this by the force of publi^opinion which makes dissent, 
or even doubt, subject to various kinds of ostracism. 

Smaller social organizations functioning witlun the gen- 
eral national structure resemble, in so far as their purpose 
permits, die^largerj^rganizations. They must do so to main- 



24 T he Folklore of Capitalism 

tain a logical place within it. The smaller organizations in 
turn subdivide themselves in somewhat the same manner as 
the larger ones. A Rotary club or a national association of 
scholars follows the general national pattern of constitu- 
tional government. Indeed, a social organization may be 
compared to the organizations of physical energy described 
by scientists as "‘matter.” The atom is a smaller solar system. 
In the same way one finds in all social organization, large 
and small, the same current taboos, political tricks, and sub 
rosa machines representing the conflicting^ ideals found in the 
n^onal government. Smaller organizations in any culture 
follow the pattern of the larger ones. At the bottom (or at the 
top, depending upon which end of the telescope you are look- 
ing through) is the individual, who, in his own life, responds 
to the symbols and ideals of his government, the business 
organization which feeds him, and the social organizations 
which give him dignity. For example, at dilFerait periods of 
the same day the judge on the bench will successively take 
the roles of a martinet, an easygoing man about town, a stern 
father, and a dreamy metaphysician, and probably belong to 
a scries of organizations which offer him a platform upon 
which he may play each of these successive parts. He may 
even, in a spirit of adventure, play a criminal role for a time, 
visiting some low dive or searching release in some other 
disapproved activity supported by the so-called criminal ele- 
ments. If he does not do this, he will play these parts vicari- 
ously by reading detective stories and attending melodramas 
in which the life of the criminal is pictured in more romantic 
aspects. 

This being so, we shall attempt to analyze a few of the 
elements common to all social organizations, large and small, 
whatever their purpose. These elements obtain in more even 
balance in the larger national organizations compelled to rep- 
resent all the aspects of humar^ activity. Nevertheless, al- 



T he Psychology of Social Institutions 25 

though the emphasis may be different, they are discovered 
even in such minor affairs as Rotary clubs, women’s clubs, or 
Boy Scout troops. The elements which all social organiza- 
tions share in common may tentatively be described as 
follows: 

1. A creed or a set of commonly accepted rituals, verbal 
or ceremonial, which has the effect of mating each indi- 
vidual feel an integral part of the group and which makes the 
group appear as a single unit. This is a unifying force and is 
as mysterious as the law of gravitation. It is ordinarily called 
a psychological factor because it is impossible to think of pur 
language and our conduct except in terms of separate physi- 
cal and mental universes, in spite of the fact that we are 
beginning to realize that these two universes are not separate. 

2. A set of attitudes which makes the creed effective by 
giving the individual prestige, or at least security, when he 
subordinates what are orJinarily called ‘‘self^ interests” to 
those of the group. 

3. A set of institutional habits by means of which men 
are automatically able to^^fk together without any process 
of conscious choice as to whether they will cooperate or not. 
It is, of course, difficult to separate attitudes and institutional 
habits from creeds, and yet it is convenient to do so because 
in our way of thinking it is a custom to regard a habit as a 
different kind of process from action based on conscious 
thought. 

4. The mythological or historica^tradition which proves 
that an institutional creed has been ordained by more than 
human forces. This mythology may take every conceivable 
form, depending on the culture. It may emphasize humani- 
tarian vdues or nonhumanitarian values, warlike or peace- 
time diversities. However, although the emphasis may differ 
in different cultures, all the common human values will be 
found represented in some form or other, whether the or- 



26 T he FolJ^ore of Capitalism 

ganization be a primitive tribe or the New York Stock Ex- 
change. 

Granted these essentials, we find successful organizations. 
Without them, organizatjon can be maintained oiily^^^^ 
and force cannot continue long because it is too exhausting. 
A number of individuals cannot be found successively to 
represent the hard-boiled qualities necessary for such or- 
ganizations. 

The separation of the psychological mechanics of institu- 
tions into these four elements is, of course, artificial. Each is 
an outgrowth of the other; attitudes create the necessity for 
words to describe or celebrate them; words induce new and 
different attitudes. Mythologies which support creeds are 
distinguished from institutional habits by no sharp definition. 
Society functions like an anthill. If we were compelled to 
plan each day how to get food into New York City and 
garbage out of it, we would be lost and the people would 
starve. This separation of the psychological forces in society 
into various elements helps us to think because it follows the 
customary ways of thinking about society and at the same 
time permits us to observe institutions from without rather 
than from within. 


Institutional Creeds 

Because words and ceremonies are our only methods of com- 
munication, everywhere we find that the creed is regarded as 
the cornerstone of social institutions. “In the beginning was 
the Word” is an idea which has been repeated over and over 
wherever language is used. In this way of thinking we are as 
primitive as the people of the Old Testament. 

Therefore, the folklore of every people runs in something 
like this form. A long time ago, with the aid of some sacred 
and infallible force, certain exceptionally gifted forebears 



T he Psychology of Social Institutions 27 

formulated a lot of principles which contained the funda- 
mentals of social organization. Nations which, like the 
United States, trace their beginnings to some single event 
think that their principles were discovered all at one time. 
This circumstance gives them a written constitution. Nations 
like England, which do not claim any sudden birth, always 
find their principles in a whole series of historical events, and 
hence their “constitution” is unwritten. The English consti- 
tution is unwritten, not because of an absence of writing in 
England, but because sentimental associations of the English 
did not concentrate on any single event or document. 

In this country we like to think that we decided to write 
down all our governmental principles in one document called 
the Constitution. Actually, the Constitution consists of thou- 
sands of documents written at various times. Yet since our 
origin as an independent nation centered around one historic 
event, we emphasize what was written at that time and call 
it a written constitution. This folklore has caused many naive 
books to be written on the advantages of a people getting to- 
gether and deciding to write their constitution. Learned men 
who thought this was a better plan have often wondered why 
England did not decide to do it. The writer recalls a course 
in college in which one of the matters discussed was whether 
England had not made a mistake in not reducing her consti- 
tution to definite written form. In a similar way the myths 
of primitive governments may center either on a single event 
or on a series of events in which the actors arc individuals of 
more than human capabilities. 

In an age where Reason is God, constitutions or funda- 
mental creeds are always supposed to be the result of ra- 
tional thought on the part of our forebears. Thus Rousseau 
depicted a social contract by which men agreed to stop fight- 
ing because this seemed such an eminently reasonable hy- 
pothesis to a peace-loving man. In an age of mysticism the 



28 T he Volhlore of Capitalism 

tables are handed down from on high instead of being dis- 
covered by reason. In more primitive mysticism, which is un- 
able to produce adequate literary lights, the constitution is 
usually in the form of a sign or a poem. However formulated, 
all these kinds of constitutions perform the same purpose. 
They furnish the limits beyond which controversy must not 
extend. Arguments may occur within the terms of the con- 
stitution, but to attack the constitution itself is heresy and 
calls down penalties which vary with the culture of the 
people from a mild ostracism to instant execution. In times 
of security popular opinion will always stand for more skep- 
ticism of fundamentals than in times of spiritual trouble, just 
as discipline in the army always relaxes in a comfortable post. 

Having acquired a constitution through the intervention 
of exceptionally gifted men, the folklore of every nation then 
assumes that the people accepted it as truth and proceeded to 
live up to it. Dissenters are shown the light by the process of 
education. Whatever gaps were left by the physical inability 
of the forefathers to consider everything are filled by the 
learned men of the time, with material which they manufac- 
ture, not out of whole cloth but out of the principles of the 
original document. If this process is questioned it is always 
answered that the forefathers wanted the constitution to be 
a growing and not a static thing, and invariably some of them 
are found who said just that. If, however, a gap is left un- 
filled, it is always pointed out that a constitution cannot be 
one thing today and another tomorrow, and invariably there 
are found a number of great men who stated this with some 
vehemence in the past. Each argument is used alternately by 
the Supreme Court of the United States, but it should be kept 
in mind that we are talking here not about the United States 
Constitution but about every organizational creed. This type 
of thinking is particularly evident in the theology of 1850, 
when men spoke of the word above God. Not even God 



T he Psychology of Social Institutions 29 

could violate the inevitable logical principles deduced by true 
reason, because to assume so would be to assume that God 
was unreasonable, which would be heresy. 

The language of the Constitution is immaterial since it 
represents current myths and folklore rather than rules. Out 
of it are spun the contradictory ideals of governmental 
morality. For example, in 1937 we find the American Bar 
Association Journal editorially recommending that the letter 
of the Constitution be disregarded in a time of crisis. Re- 
ferring to the President’s Supreme Court proposal, the editor 
says: 

If the proposed act violates the spirit of the Constitution and 
threatens the breakdown of an essential part of it, “constitutional 
morality” certainly forbids it. To act under such circumstances 
is simply to exercise a brute power. And the spirit is more im- 
portant than the letter. As long as the spirit of the Constitution 
is followed, there will be small trouble about the letter, and the 
great instrument and guarantee of our liberties is safe. But when 
the letter is followed in disregard of the spirit, catastrophe may 
be near. 

The beauty of this kind of argument is that it makes the 
Constitution very elastic indeed, so that it can be used on 
both sides of any moral question without the user being 
bothered with what the Constitution actually says. It is essen- 
tial to constitutionalism as a vital creed that it be capable of 
being used in this way on both sides of any question, because 
it must be the creed of all groups in order to function as a 
unifying symbol. This way of thinking is essential to all gov- 
ernmental organizations. It is the method by which the or- 
ganization can take pride in the superiority of its traditions. 
Pride in his early struggles and a clinging to traditions which 
have been handed to him by better men than he are deep 
seated within the psychology of the individual. 



30 The Folklore of Capitalism 

The notion that men obtain a creed, either through the 
exercise of pure reason or from some other superhuman 
power, is so firmly fixed in popular and scholarly thinking 
about government because it is the essence of all worship, 
and of all religion. Nothing is so destructive of social habits 
or of a mystical attitude which puts a divine character into 
physical objects as the questioning of the existence of some 
power or reason or mystic word, to which men can pray. 
Nothing disturbs the attitude of religious worship so much 
as a few practical observations. And yet that spiritual need is 
something which cannot be denied to any group of men, not 
even to scientists. 

Illustrative of the search for the proper creed, we find the 
universally held idea that the reason nations have trouble is 
because of a sinful desertion of the right principles. Thus 
Germany sinfully worshiped false gods, quit searching for 
the proper principles, and got Hitler. The beauty of this ar- 
gument, of course, is that Hitler himself is searching for 
truth and right just as feverishly as his opponents. The ques- 
tion, therefore, boils down to which of the two is sound. 

Since most civilized cultures are astonishingly alike, logi- 
cal analysis usually uncovers the fact that the creeds are alike. 
For example, as this is being written the greatest fear of 
conservative people is that we are establishing a bureaucracy 
like that of Germany. Hitler appears to be equally opposed to 
bureaucracy, as appears from the following interview (Wash- 
ington Star, September 14, 1936) : 

Germany will guard jealously the principle of private enterprise 
in business, Chancellor Adolf Hitler asserted today. 

The Nazi dictator denied that his plans for the future of the 
nation included marshaling all industrial establishments under 
governmental control and declared: 

“I will never permit bureaucratization of German industry.” 

The Reichschancellor’s views on the business future of his 



T he Psychology of Social Institutions 3 1 

country were outlined in an informal conversation at Nurnberg 
Castle after a source close to the Fuehrer had predicted a decree 
to make effective his four-year plan for economic independence 
might be made public this week. 

“I am convinced there must be competition to bring the best 
to the top,*’ Hider declared. “I could take over all business, but 
what would I have then — nothing but a bureaucracy.** 

Nationalization of German industry. Hitler predicted, would 
result in “workers and executives losing interest** in their jobs 
and “it would not be long before they would become mere job- 
holders expecting automatic advancement by seniority instead of 
initiative.** 

“Great improvement in manufacturing processes springs from 
keen rivalry between competitors,’* the Reichsfuehrer said. 

“But does not Socialist economy presuppose restriction of pri- 
vate enterprise?** one of his listeners asked. 

“Of course,’* Hitler replied, “wherever private interests clash 
with the interests of the nation the good of the community must 
come before profits to the individual. 

“But that still leaves abundant room for private enterprise,” 
the Chancellor declared. 

The Fuehrer earlier had emphasized before a session of the 
National Socialist Convention that Germany is armed and ready 
to defend “the miracle of its own resurrection.” 

It is considered quite a sophisticated observation in these 
curious times to say that both political parties are exactly 
alike. Few, however, understand that the reason for this is 
that where the center of attention is abstractions rather than 
practical objectives all parties are bound to be alike. The 
creed of each must represent all the current conflicting ideals 
and phobias. Only minority parties which do not expect to 
get into power can write creeds without internal contradic- 
tions. Opposing parties which hope to win will necessarily 
worship the same gods even while they are denouncing each 
other because they are talking to actual voters and not to 



32 The FolJ^ore of Capitalism 

some ideal society of the future. This is not something to 
complain about. It follows from the fact that every govern- 
mental creed must represent all the contradictory ideals of a 
people if it is to be accepted by them. 

Institutional Attitudes and Habits 

Sn^CE our chief concern in this volume is with ways of think- 
ing about society, we will give little space to the social atti- 
tudes and habits which unify organizations. These two fac- 
tors are easily understood in institutions where the creeds are 
admittedly ceremonial in character. Thus we understand the 
attitudes and habits which center around the Christmas cele- 
bration because the creed of Santa Claus is recognized to be 
pure drama. We therefore can talk about Santa Claus objec- 
tively without destroying his emotional value. With the rec- 
ognition of the fact that church creeds are not searches for 
universal truth, we can understand better the function of 
churches in society. Preachers like Harry Emerson Fosdick 
preach realistically and effectively about the place that the 
Church can and should take in the community. Fosdick 
realizes that the creed is important only as a symbol of unity 
— and that the effectiveness of the Church must be judged by 
different standards from those of its theology. 

In an institution where the creed is thought to represent 
truth and is supposed to describe what the organization does, 
as in government or law, the factors which we have described 
as habits and attitudes are generally ignored. Pathology gives 
way to mythology. When someone attempts to describe how 
such an institution works, he is called a “realist” or a “cynic” 
because he makes believers uncomfortable. Thus to describe 
how the law, or Capitalism, or the Supreme Court of the 
United States actually works is to appear to attack these sym- 
bols. The actual habits and attitudes which operate under the 



T he Psychology of Social Institutions 33 

banner of the creed to make the institution effective have a 
slightly obscene appearance. Nice people do not want to dis- 
cuss them, except for the purpose of getting rid of them. 

We will not delay our exposition by attempting a defini- 
tion of the distinction between what we have called attitudes 
and habits and what we have called creeds and mythologies. 
The writer as a lawyer has indulged too long in the vice of 
definition to have any illusions that it leads to understanding. 
If the words do not carry a picture of the kind of social 
phenomena referred to they are unfortunately chosen. How- 
ever, they happen to be the best words which now come to 
mind. 


The Mythology of Institutions 

The logical content of creeds never realistically describes the 
institutions to which the creeds are attached. Every phrase 
in the Constitution designed to protect the submerged indi- 
vidual has become an instrument for the protection of large 
organizations. There is not time to develop here this com- 
monplace theme. To illustrate we use again the development 
of the due process clause because it has been referred to so 
frequently that it is familiar to everyone. Due process of law 
under the Fifth Amendment unquestionably referred to arbi- 
trary criminal prosecution of individuals. The words are: 

No person shall be held to answer for a capital, or otherwise in- 
famous crime, unless on a presentment or indictment of a grand 
jury, except in cases arising in the land or naval forces, or in the 
militia, when in actual service in time of war or public danger; 
nor shall any person be subject for the same offense to be twice 
put in jeopardy of life or limb; nor shall be compelled in any 
criminal case to be witness against himself, nor be deprived of 
life, liberty, or property, without due process of law; nor shall 
private property be taken for public use, without just compen- 
sation. 



34 T^he Foll{lore of Capitalism 

Today this amendment is one of the reasons why railroads 
are protected from a Federal pension system. Public control 
of business becomes the same as taking away property. Great 
national organizations become individuals. Only a short time 
ago nobody saw anything strange or out of the way in the 
change. Scholars in law schools proved that it was not a 
change at all and were generally believed. 

It is therefore not the content of the governmental creed 
which molds institutions, but the imaginary personalities 
which make up the national mythology. Every culture has its 
hierarchy of divinities, like the ancient Greeks. This hier- 
archy is never recognized as a mythology during the period 
when it is most potent. It is only the myths of other peoples 
or other times that we label as myths. The power of any cur- 
rently accepted mythology lies in the fact that its heroes arc 
thought to have a real existence. There is always a large num- 
ber of them because each mood and aspiration must be repre- 
sented. Every institution tries to represent all of these heroes 
at once. Thus the American industrial organization is a hard- 
boiled trader, a scholar, a patron of modern architecture, a 
thrifty housewife, a philanthropist, a statesman preaching 
sound principles of government, a patriot, and a sentimental 
protector of widows and orphans at the same time. Let me 
designate the heroes of a nation and I care not who writes 
its constitution. 

In the days of chivalry national heroes were princes of the 
Church or warriors seeking high adventure for a holy mo- 
tive. These imaginary personalities gave form and logic to 
governmental structure. King Richard went to the Crusades 
in an unconscious response to the demand that the Govern- 
ment of England imitate its myths, just as the ruling class of 
every time unconsciously imitates the little ideal pictures to 
which it owes its prestige. 



T he Psychology of Social Institutions 35 

In the United States the mythology used to be very simple. 
The predominant figure was the American Businessman. 
Warriors were respected, but they had a distinctly minor 
place. The National Government had to imitate the Ameri- 
can Businessman. Whenever it failed, people became 
alarmed. A businessman balances his budget. Hence the un- 
balanced budget which was actually pulling us out of the de- 
pression was the source of greater alarm than administrative 
failures which were actually much more dangerous. The 
American Businessman bosses his employees. Hence the en- 
couragement of the C.I.O. was thought to be the forerunner 
of a revolution, in spite of the fact that never had industrial 
unrest been followed with less actual disorder. 

The creed of the American Businessman was celebrated in 
our institutions of learning. Since the American Scholar was 
a minor divinity, some of his characteristics had to be as- 
sumed by the great industrial organization. Therefore col- 
leges were endowed to prove that the predominant divinity 
was supported by reason and scholarship. All the Christian 
virtues were also ascribed to him — ^for the selfishness of 
business was an enlightened selfishness which resulted in the 
long run in unselfish conduct if it were only let alone. 

The American Businessman was independent of his fel- 
lows. No individual could rule him. Hence the “rule of law 
above men” was symbolized by the Constitution. This meant 
that the American Businessman was an individual who was 
free from the control of any other individual and owed alle- 
giance only to the Constitution. However, he was the only 
individual entitled to this kind of freedom. His employees 
were subject to the arbitrary control of this divinity. Their 
only freedom consisted in the supposed opportunity of la- 
borers to become American businessmen themselves. 

It is this mythology, operating long after the American 
Businessman has disappeared as an independent individual, 



36 T he Folklore of Capitalism 

which gives the great industrial organization an established 
place in our temporal government. Every demand on these 
great industrial structures is referred to the conception of the 
American Businessman as a standard. 

Thus pension systems for great corporations are all right 
provided businessmen inaugurate them. Economic coercion 
is permitted provided these heroes accomplish it. Boondog- 
gling of every kind is subject to no criticism if businessmen 
finance it. Charity and welfare work, provided they are used 
to portray businessmen in their softer and more sentimental 
moods, are lovely things. When undertaken by the Govern- 
ment, they are necessary evils because such activity impairs 
the dignity and prestige of our great national ideal type. The 
businessman is the only divinity supposed to conduct such 
affairs. Therefore one never hears a community chest spoken 
of as a necessary evil as the dole is. Private charity even in 
times when it is an obvious failure is supposed to be more 
efficient than government relief. 

In this mythology are found the psychological motives for 
the decisions of courts, for the timidity of humanitarian ac- 
tion, for the worship of states rights and for the proof by 
scholars that the only sound way of thinking about govern- 
ment is a fiscal way of thinking. Move Communism or any 
other kind of creed into this country, keep the present na- 
tional hierarchy of tutelary divinities, and one would soon 
find that the dialecticians and priests were ingenious enough 
to make communistic principles march the same way as the 
old ones. So long as the American Businessman maintains 
his present place in this mythological hierarchy, no practical 
inconvenience is too great to be sacrificed to do him honor — 
every humanitarian impulse which goes counter to the popu- 
lar conception of how the businessman should act is soft and 
effeminate. 

Coupled with the national heroes in every institutional 



T he Psychology of Social Institutions 37 

mythology is the national Devil. Our Devil is governmental 
interference. Thus we firmly believe in the inherent malevo- 
lence of government which interferes with business. Here 
are people who are not to be trusted — they are the bureau- 
crats, the petty tyrants, the destroyers of a rule of law. Or- 
ganizations always tend to assume the characters given to 
them by popular mythology. Hence the government is no 
career for an up-and-coming young man. Governmental in- 
stitutions are not to be trusted to hire their employees. We 
must control their inherent malevolence by Civil Service 
rules. Civil Service is a great protection for mediocrity and 
thus tends to make the government fit the bureaucratic pre- 
conceptions. Thus the powerful influence of the national 
hierarchy of gods moves institutions into patterns from 
which they cannot escape until the attitudes change. 

Germany is a country which loves to wear uniforms. It is 
said that it is difficult to keep even German railway con- 
ductors from wearing out their uniforms at home. The na- 
tional hero is a soldier. Therefore, no economic principles 
ever designed have prevented Germany from assuming the 
atmosphere of at best a military academy with a scholarly 
faculty, and at worst an armed camp. 

How far nations can be induced to revise their mythologies 
is a psychological problem not unlike the problem of how to 
change the admiration and dislikes of the individual. The 
politician does not attempt to change the mythology. He 
works with it unscrupulously to get results. The trouble with 
him is not that his technique is bad but that his ends are not 
broad or humanitarian. Yet in our present medieval atmos- 
phere it is his techniques which are condemned. His ends, in 
so far as they are selfish, are supposed to work for the greatest 
benefit of all in a free economic system. 

Probably the only way in which mythologies actually 
change is through the rise to power of a new class whose 



38 T he Folklore of Capitalism 

traditional heroes are of a different mold. Nothing seems 
clearer than that the attitudes of any given ruling class are 
so set that all the arguments in the world will not change 
them. 

This can be observed in revolutions of all kinds, peaceful 
as well as violent. A ruling class ceases to perform the func- 
tions necessary to distribute goods according to the demands 
of a people. A new class appears to satisfy those demands. At 
first it is looked down on. Gradually it accumulates a mythol- 
ogy and a creed. Finally all searchers for universal truth, all 
scholars, all priests (except, of course, unsound radicals), all 
educational institutions of standing, are found supporting 
that class and everyone feels that the search for legal and eco- 
nomic truth has reached a successful termination. We can 
observe the rise of a race of traders and money lenders against 
the system of law and economics of chivalry and feudalism 
which today looks incredibly romantic, but which then 
looked like the very bedrock of reality. No one would have 
dreamed in the Middle Ages that the despised creed of the 
trader and the money lender — a creed of selfishness and wor- 
ship of the then lowest material values — should rise to be a 
compendium of everything most respectable in temporal 
affairs. 

Today we can observe the rise of a class of engineers, sales- 
men, minor executives, and social workers — all engaged in 
actually running the country’s temporal affairs. Current 
mythology puts them in the role of servants, not rulers. So- 
cial workers are given a subordinate role. For purposes of 
governmental policy their humanitarian ideas are positively 
dangerous, because they put consideration of actual eflS- 
ciency in the distribution of goods above reverence for the 
independence and dignity of the businessman. It is as if a 
usurer attempted to sit at the table in social equality with the 
medieval baron to whom he was lending money. 



T he Psychology of Social Institutions 39 

Nevertheless, it is this great class of employees, working 
for salaries, which distributes the goods of the world. Trad^ 
ers stiU are possessed of the symbols of power. The new class, 
however, has already shown signs of developing a creed of 
its own and a set of heroes. In our universities it is repre- 
sented by a group of younger economists, political scientists, 
and lawyers. True, these men are often branded as unsound. 
Older universities look at their new economic thinking with 
suspicion, but its prestige grows with the prestige of the class 
of business and social technicians which it represents. Its 
mythology does not include the worship of the American 
Businessman. So far it is destructive only. On the positive 
side it is as yet undeveloped. However, one should remember 
that a fully developed creed and mythology are not found 
until the class which they support is securely in power, Adam 
Smith did not think up principles by which the merchant 
and manufacturer gained power. He supplied them with a 
philosophy after they had taken charge of the temporal gov- 
ernment. 

The creeds and mythologies of smaller institutions always 
follow the pattern of the larger ones. The writer found the 
transition from the life of a trial lawyer to that of a professor 
at the Yale School of Law a most interesting one. The aca- 
demic life was different from practice in that the scholarly 
heroes were men who dug up little sections of truth for the 
love of it — a purely monastic ideal. Yet this mythology was 
tempered and molded by the great overshadowing divinity, 
the American Businessman. Yale was doing what it could to 
search for truth in the same organized efficient way in which 
the United States Steel Corporation made steel. There was 
therefore much about Yale in 1930 in common with the 
Rotary Club of Laramie, Wyoming, from which the writer 
hailed. “Service” was the watchword and the organized 
“project” was the crusade. In 1930 the Institute of Human 



40 T he Fol\lor€ of Capitalism 

Relations at Yale occupied the center of the stage, dedicated 
to proving that scholars could incorporate research and 
thereby gain the advantages of mass production. Dinners 
were held and speeches made in imitation of the annual din- 
ner of a chamber of commerce. Had the large corporation 
retained its magic, perhaps the Institute of Human Relations 
might have maintained its prestige. However, scholarship, 
incorporated like a manufacturing plant, lost caste with the 
distrust of the great corporation during the depression. 
Therefore, at the Tercentenary at Harvard in 1936, we find 
scholars using the symbol of the Supreme Court of the 
United States rather than incorporated scholarship, because 
the Court at the time was a more important symbol of safety 
and security than the American business corporation. 

The Change of Democracy** from a Creed 
to a Political Fact 

Curiously enough, in all this holy war against Communism 
and Fascism to make the world safe for our prevailing 
divinity, we find very little spiritual conflict about the prin- 
ciples of democracy. Democracy was accepted as a political 
fact, not as something to be chosen or rejected. The demo- 
cratic tradition had become recognized as a tradition and had 
ceased to be regarded as a set of guiding principles. All over 
the world, except perhaps in the Orient, there was a recogni- 
tion that popular majorities were necessary for a successful 
government regardless of what the creed happened to be. A 
strange thing had happened to democracy as a creed. Few 
believed any more that it was a peculiarly sacred or divine 
thing. The “principles” of democracy were not worshiped 
as they once were, as fundamental truths. Everyone recog- 
nized the limitations of the average man — and few thought 
that these limitations disappeared in a group. 

Democracy ceased being a creed. It simply became a name 



T he Psychology of Social Institutions 41 

for a type of organization controlled by voters. From this 
point of view men made two great discoveries in the art of 
government: 

1. They discovered that it is immaterial whether democ- 
racy is morally beautiful or not. They recognized as a fact 
that it was more important that an institution keep in touch 
with the mass of its members than that it follow rational 
principles. The word “democracy” therefore came to repre- 
sent the notion that political techniques which had nothing 
to do with rational principles were a necessary part of social 
control. This was first discovered in connection with the dis- 
tribution of goods by large organizations. Advertising men 
used slogans rather than descriptions of their products. Poli- 
ticians soon found the advantages of such techniques over 
either appeals to pure reason or the grosser forms of vote 
buying. Polls began to be taken on public questions — experts 
began to develop in the ascertaining of public attitudes. Prin- 
ciples and political platforms became more and more of a 
ceremony and less a matter of belief to those who wrote them. 

2. They discovered that all sorts of symbols are necessary 
for the preservation of the political fact of democracy, many 
of which violate its creeds. The fact that political platforms 
were inconsistent with political action troubled people less 
and less. 

This sort of political realism about democracy was brought 
home to us by the success of the dictatorships in Russia and 
Germany. In these countries the revolutionary governments 
undertook deliberately to arouse the intense enthusiasm of 
their peoples and to keep it at a high pitch. The method used 
was not rational; it was the rhythm of uniforms, salutes, 
marching feet, and national games. The strength of Hitler 
lay in the fact that he put everyone to work and managed to 
develop national pride. His weakness lay in his persecutions. 

Such persecutions are not, I believe, necessary to the cxer- 



42 T he Folklore of Capitalism 

cise of national power or the development of national morale. 
The reason why they are apt to occur in times of change is 
that respectable people in such times are too devoted to prin- 
ciples to solve immediate problems or to build up morale by 
the objective use of ceremony. They are too obsessed with the 
principles of government by the people to know how it 
works. 

This principle that national morale is more important than 
logic and that the present is more important than the future 
is little understood in an age when people who should know 
how to rule are lost in a search for universal truth. They con- 
stantly strive to ferret out the true principles of democracy 
and follow them logically. They think that “democracy” is 
a “form” of government which nations educated up to it 
consciously follow and discard at their peril. They think that 
it is another of those “systems” of government. 

The old creed of democracy as our fathers knew it was a 
useful slogan to bind together those who rose to fill the gaps 
left by an incompetent aristocracy. It was a useful slogan to 
stir national pride in a people who had no ruling class. Like 
all creeds it was in no way descriptive. It borrowed the old 
symbols of aristocracy since it had to represent all the current 
conflicting ideals. Thus the lack of an ecclesiastical hierarchy 
was filled by the slogan, “The voice of the people is the voice 
of God.” The gap left by the absence of an aristocracy was 
bridged by the constant reference to the “nobility” of the 
common people and reference to the people as “king.” The 
necessity to personify a ruler and invest him with divine 
power was filled in the personification of the people. Under 
these slogans a small ruling class developed in the United 
States. 

The democratic creed of that ruling class, however, was 
full of so many hidden conflicts that it developed in America 
more sub rosa institutions than in any other Western nation. 



T he Psychology of Social Institutions 43 

The “people” in this democracy were supposed to choose 
sound economic principles in preference to unsound ones like 
a scholargarchy. They were to reject unsound legal principles 
like a theocracy. In fact, the people were permitted to play 
every conceivable role that had marched in the pageant of 
history since the Roman Empire. Only one thing they were 
not permitted to do in public, and that was to think real- 
istically about their government. 

Therefore, our real government was conducted by non- 
respectable politicians. Exceptions there were, such as Jeffer- 
son and Roosevelt, who combined political technique with 
aristocratic background. Such men incurred the bitter enmity 
of their friends as traitors to their class. Actual political lead- 
ers in the peculiar democracy we established were generally 
the type who theoretically should have been distrusted by the 
people, because they appealed to the emotions instead of 
reasoning analytically for the benefit of thinking men. Hence, 
when the people of New York City or Chicago sought real 
representation they were forced to choose organizations like 
Tammany Hall or the Thompson machine, since respectable 
people could not think politically. And choose them they did, 
in spite of the gloom of our editorial table-pounders at the 
refusal of the people to learn the lessons of history. 

The only class which was permitted to think objectively 
about what it was doing without violating its own creed was 
big business. In this area both learned and popular philoso- 
phy proved that whatever mistakes business made canceled 
each other, that its greed was only a form of unselfishness, 
and that its corruption was only the work of an occasional 
emissary of Satan sent up from below to plague mankind. 

Of course, the law and the economics which permitted 
this class to act practically allowed its members to be respect- 
able and efficient at the same time. In this favorable atmos- 
phere their natural organizing ability was not hampered by 



44 T he Foll{lor€ of Capitalism 

taboos. They developed a productive plant which was the 
marvel of the modern world. As a creed, democracy never 
even remotely resembled the actual democracy which existed 
in this country, but as a political fact it produced a spiritual 
government in Washington to represent its ideals and a 
temporal government in our industrial centers which gave 
scope for the productive energy of its people and which, at 
the same time, never lost their support, violated their taboos, 
or contradicted the mythology they had set up for themselves. 

In our thinking about democracy we have dropped to a 
large extent the medieval atmosphere. We do not argue about 
it any more as we argue about a creed. We have ceased to 
write books describing how sacred it is. We realize that in 
its essence it means that an effective leader must maintain 
the morale as well as the discipline of his army. It has be- 
come for us a symbol which is not intellectually questioned 
and which at the same time may be practically used. Even 
respectable people today are acquiring skill in the use of 
political techniques. The effects are noticeable. A better class 
of political leaders is in charge of our political machines. 
Grosser and more unpleasant forms of political chicanery 
are not used to the same extent as in 1900. As men have 
gradually ceased to believe in the democratic slogans as 
truths, political techniques have become less the exclusive 
property of unscrupulous people. 

Thus has democracy changed from a creed to a word de- 
scribing a political fact — from a set of symbols which must 
be followed regardless of their practicality or convenience to 
a recognition that every institution must keep the faith and 
loyalty of its members, or perish. Today, when sophisticated 
men speak of democracy as the only workable method of 
government, they mean that a government which does not 
carry its people along with it emotionally, which depends on 
force, is insecure. They mean that it is better for a govern- 



The Psychology of Social Institutions 45 

merit to do foolish things which can have popular support 
than wise things which arouse people against it. They mean 
that if a man is not contented, material comforts will do him 
no good. They mean that the art of government consists in 
the technique of achieving willing popular acceptance; that 
what people ought to want is immaterial; that democratic 
government consists only in giving them what they do want; 
that progress in government can come only by improving 
the wants of the people through the technique of removing 
their prejudices; and, finally, that the removal of prejudice 
must come first or material and humanitarian progress, im- 
posed by force, will fail. When we consider democracy as a 
political fact, we are no longer concerned with the question 
of whether it ought to be admired as a fine thing or con- 
demned as a stupid thing. 

Our thinking about symbols of money and credit seldom 
takes such a fact-minded point of view. Here we are caught 
in formulas which pretend to be universal truths. We believe 
in the capitalistic system, as we used to believe in democracy, 
not as a tool, but as a set of abstract principles to be followed. 
The systems of government over which we have our theo- 
logical disputes are no longer monarchy, aristocracy, and 
democracy, but Capitalism, Communism, and Fascism. 
Capitalism is a good thing in the abstract. It has its following 
of learned men and philosophers. It is no more descriptive 
of social organization today than the theology of the mon- 
archy was descriptive before the French Revolution. It is 
instead an arsenal of weapons to be used against new or- 
ganizations, rising because of a compelling need, but ham- 
pered because they have as yet found no place in accepted 
institutional mythology. The terms Communism and Fas- 
cism are used to denounce these new organizations as breed- 
ers of heresy. The acceptance of the slogans of Capitalism as 
tools rather than as truths is still over the horizon. 



CHAPTER III 


The Folklore of 1957 

In which it is explained how the great sciences of law and eco- 
nomics and the little imaginary people who are supposed to be 
guided by these sciences aSect the daily lives of those who make, 
distribute, and consume our goods. 

T he folklore of 1937 was expressed principally by 
the literature of law and economics. Here were 
found elaborately framed the little pictures which 
men had of society as it ought to be. Of course, this literature 
was not called folklore. No one thought of sound principles 
of law or economics as a religion. They were considered as 
inescapable truths, as natural laws, as principles of justice, 
and as the only method of an ordered society. This is a char- 
acteristic of all vital folklore or religion.^ The moment that 
folklore is recognized to be only folklore it ceases to have the 
effect of folklore. It descends to the place of poetry or fairy 
tales which affect us only in our romantic moments. For ex- 
ample, years ago Mr. Justice Cardozo pointed out that law 
was really literature. This is true. Yet if it were generally rec- 
ognized to be true, the particular kind of literature known as 
law would not have the kind of influence it has today. 

The effect of the peculiar folklore of 1937 was to encourage 
the type of organization known as industry or business and 

^Polybius, writing about the Roman social order before the birth of 
Christ, observed: 

“But it seems to me the most distinctive superiority of the Roman po- 
litical and social order is to be found in the nature of their religious con- 
victions; and I mean the very thing which other peoples look upon with 
reproach, as superstition. But it nevertheless maintains the cohesion of the 
Homan state.** (Polybius, VI, 56.) 



47 


The Folklore of igs7 

discourage the type known as government. Under the pro- 
tection of this folklore the achievements of American busi- 
ness were remarkable. There was no questioning of myths 
which supported independent empires by those engaged in 
those enterprises. So-called private institutions like General 
Motors never lost their direction through philosophical de- 
bate. The pioneer efforts at industrial organization in this 
country had been wasteful beyond belief, but bold and con- 
fident. 

With respect to political government, however, our super- 
stitions had the opposite effect. They were not a cohesive 
force, but a destructive and disintegrating one. The pioneer 
efforts of the Government were timid, indecisive, and inef- 
fective. When it became necessary for the Government to fill 
gaps in the national structure in which private business en- 
terprise was an obvious failure, the myths and folklore of 
the time hampered practical organization at every turn. Men 
became more interested in planning the culture of the future 
— in saving posterity from the evils of dictatorship or bu- 
reaucracy, in preventing the American people from adopting 
Russian culture on the one hand, or German culture on the 
other — than in the day-to-day distribution of food, housing, 
and clothing to those who needed them. Mystical attacks on 
practical measures achieved an astonishing degree of success. 
Debaters and orators rose to the top in such an atmosphere 
and technicians twiddled their thumbs, unable to use their 
skills. 

The operation of this legal and economic folklore which 
paralyzed organizations with the name “government” at- 
tached to them will make a fascinating study for the future 
historian. He will note a striking resemblance to the medieval 
myths which impeded medical knowledge for hundreds of 
years. He will observe men refusing benefits obviously to 
their practical advantage when tendered by the Government, 



48 T he Foliar e of Capitalism 

because they violated current taboos. A few incidents will il- 
lustrate how men constantly sacrificed present advantage in 
order to avoid the future retribution supposed to result from 
the violation of these taboos. 

In the spring of 1936 the writer heard a group of bankers, 
businessmen, lawyers, and professors, typical of the learned 
and conservative thinkers of the time, discussing a crisis in 
the affairs of the bankrupt New York, New Haven, and 
Hartford Railroad— once Ae backbone of New England, the 
support of its institutions and its worthy widows and or- 
phans. They were expressing indignation that a bureaucratic 
Interstate Commerce Commission, operating from Washing- 
ton, had decreed that passenger rates be cut almost in half. 
Every man there would directly benefit from the lower rate. 
None were stockholders. Yet all were convinced that the 
reduction in rate should be opposed by all conservative citi- 
zens and they were very unhappy about this new outrage 
committed by a government bent on destroying private busi- 
ness by interfering with the free judgment of its managers. 

This sincere indignation and gloom had its roots not in 
selfishness nor the pursuit of the profit of the moment, but 
in pure idealism. These men, though they owned no stock, 
were willing to forego the advantage of lower fares to save 
the railroad from the consequences of economic sin. They 
took a long-range view and decided that in the nature of 
things the benefits of the lower rates would be only tempo- 
rary, because they had been lowered in violation of the great 
principle that government should not interfere with business. 
Some sort of catastrophe was bound to result from such an 
action. The writer tried to get the picture of the impending 
catastrophe in clearer detail. Did the gentlemen think that, 
under the new rates, trains would stop running and maroon 
them in the City of Elms? It appeared that no one quite be- 
lieved this. The collapse which they feared was more nebu- 



The Voll^ore of ig^y 49 

lous. Trains would keep on running, but with a sinister 
change in the character of the service. Under government in- 
fluence, it would become as unpleasant as the income taxes 
were unpleasant. And in the background was an even more 
nebulous fear. The Government would, under such condi- 
tions, have to take over the railroad, thus ushering in bu- 
reaucracy and regimentation. Trains would run, but there 
would be no pleasure in riding on them any more. 

There was also the thought that investors would suffer. 
This was difficult to put into concrete terms because investors 
already had suffered. The railroad was bankrupt. Most of the 
gentlemen present had once owned stock, but had sold it be- 
fore it had reached its present low. Of course, they wanted 
the stock to go up again, along with everything else, pro- 
vided, of course, that the Government did not put it up by 
“artificial” means, which would be inflation. 

The point was raised as to whether the Interstate Com- 
merce Commission was right in believing that the road 
would actually be more prosperous under the lower rates. 
This possibility was dismissed as absurd. Government com- 
missions were always theoretical. This was a tenet of pure 
faith about which one did not even argue. 

In addition to faith, there were figures. One gendeman 
present had the statistical data on why the railroad would 
suffer. In order to take care of the increased traffic, new trains 
would have to be added, new brakemen and conductors 
hired, more money put into permanent equipment. All such 
expenditures would, of course, reflect advantageously on the 
economic life of New Haven, remove persons from relief 
rolls, stimulate the heavy goods industries, and so on. This, 
however, was argued to be unsound. Since it was done in 
violation of sound principle it would damage business confi- 
dence, and actually result in less capital goods expenditures, 
in spite of the fact that it appeared to the superficial observer 



50 T he Volhjore of Capitalism 

to be creating more. And besides, where was the money com- 
ing from.'^ This worry was also somewhat astonishing, be- 
cause it appeared that the railroad actually could obtain the 
necessary funds for the present needed improvements. How- 
ever, the answer to that was that posterity would have to pay 
through the nose. 

And so the discussion ended on a note of vague worry. No 
one was happy over the fact that he could travel cheaper. No 
one was pleased that employment would increase, or that the 
heavy industries would be stimulated by the reduction of 
rates. Out of pure mystical idealism, these men were oppos- 
ing every selfish interest both of themselves and the com- 
munity, because the scheme went counter to the folklore tc 
which they were accustomed. And since it went counter to 
that folklore, the same fears resulted from every other cur- 
rent scheme which violated traditional attitudes, whether it 
was relief, housing, railroad rates, or the Securities Exchange 
Act. Anything which could be called governmental inter- 
ference in business necessarily created bureaucracy, regimen- 
tation, inflation and put burdens on posterity. 

All this discussion was backed by much learning and 
theory. Yet it was easy to see its emotional source. These men 
pictured the railroad corporation as a big man who had once 
been a personal friend of theirs. They were willing to un- 
dergo financial sacrifice in order to prevent injustice being 
done to that big man. The personality of the corporation was 
so real to them that it was impossible to analyze the concept 
into terms of selfish interest. Does one think of personal gain 
when a member of one’s family is insulted.? With that emo- 
tional beginning, the balance of the discussion flowed out of 
the learned myths of the time, and ended where all the eco- 
nomic arguments of the time ended, in a parade of future 
horrors. The thinking was as primitive and naive as all such 
thinking must be when it is divorced from practical issues 



T he Folklore of 51 

and involved in prevailing taboos. As to the merits of the rate 
reduction from a practical point of view, neither the writer, 
nor any member of the group, knew anything. Yet such was 
the faith of these men in the formula they recited, that they 
felt that knowledge of details was completely unnecessary in 
having a positive and unchangeable opinion. 

The way of thinking illustrated by the above incident is a 
stereotype. Its pattern is the same to whatever problems it is 
applied. It starts by reducing a situation, infinitely compli- 
cated by human and political factors, to a simple parable 
which illustrates fundamental and immutable principles. It 
ends by proving that the sacrifice of present advantage is nec- 
essary in order to protect everything we hold most dear. All 
such discussions end with arguments based on freedom, the 
home, tyranny, bureaucracy, and so on. All lead into a verbal 
crusade to protect our system of government. In this way 
certainty of opinion is possible for people who know nothing 
whatever about the actual situation. They feel they do not 
have to know the details. They know the principles. 

Take another example. In 1937 ^ device known as the 
“sit-down” strike was most effectively used against the Gen- 
eral Motors Corporation. Here was a fascinating struggle to 
develop labor unity and leadership in this country, headed by 
a great organizer, John L. Lewis. As in all combat situations, 
both sides believed intensely in the morality and sacredness 
of their cause. A realist observing the struggle without the 
moral preconceptions of either of the opposing organizations 
might make a guess as to the final outcome of the labor move- 
ment. He would realize, however, that it was only a political 
guess and that a guess based on a search for the proper funda- 
mental principles of how strikes “should” be conducted by 
right-thinking conservative strikers would have no validity 
whatever. 

But here again editorial table-pounders in our most re- 



52 T he FolJ(lore of Capitalism 

spectable publications insisted that the real issue was whether, 
using the analogy of the sit-down strike, irresponsible men 
would not feel that they had the right to destroy our homes 
by conducting sit-down strikes in the parlors. Liberty, free^ 
dom, the home, were again at stake as they had been in the 
case of the New Haven rate cut. Nothing could have been 
more absurd than the suggestion that this great industrial 
struggle was in reality concerned with the right of indi- 
viduals to undisturbed possession of their homes. Yet this 
was the position usually taken by most of the so-called 
“thinking” people who filed income-tax returns. 

The great debate in 1937 over President Roosevelt’s pro- 
posal to put more liberal judges on the Supreme Court of the 
United States offers another example of this way of thinking. 
There was, of course, every reason for those who opposed the 
extension of national power represented by Roosevelt’s pro- 
gram, to cling to the Court as a last line of defense against a 
popular mandate. Here was a way of taking away from a 
great popular majority the fruits of their recent victory at the 
polls. Yet much of the opposition to the proposal came not 
from those who were opposed but from those in favor of 
the main outlines of the Roosevelt policies. They were actu- 
ally afraid of the exercise of an admitted constitutional power 
to reform the attitude of the judiciary. The argument cen- 
tered on the familiar symbols of regimentation, bureaucracy, 
freedom, and the home, which actually had as little to do 
with the issues involved as they had to do with the enforced 
reduction of rates on the New Haven Railroad. 

We use as an illustration of this type of argument the issue 
of the American Bar Association Journal for April, 1937- In 
this issue eight distinguished and alarmed leaders of the bar 
and one editor made it abundantly clear that the proposal to 
increase the membership of that Court was fundamentally 
immoral. That being so, it followed that the wages of sin is 



The Folklore of 7957 53 

death. Grave peril of a somewhat unspecific character lay in 
wait for us. The nation was about to lose its immortal soul 
and become at best a bureaucracy, and at worst a tyranny. 
The whole issue was keyed to a note of warning of impeni 
ing doom. 

For example, President Stinchfield, who contributed the 
first article, told us that if we adopted the plan “we shall have 
government from Washington covering a territory of 130 
million people.” The superficial observer might have thought 
that this was one of the objectives for which the Civil War 
was fought and therefore had its good points. But Presi- 
dent Stinchfield went on to say: “We must inevitably be- 
come a government by bureaucracy. ...” Such mysterious 
matters, of course, could not be proved, but President Stinch- 
field’s faith in the malevolence of Congress was such that he 
didn’t think proof necessary. He said: “I think we are in 
great danger at the moment.” 

Mr. Olney, who followed Mr. Stinchfield, was also gloomy 
and sad about the remote future, through whose mists his 
prophetic vision penetrated without any difficulty. He was 
particularly worried because he was afraid that labor unions 
would disappear if the President’s proposal was passed. He 
said that the measure would put them “at the mercy of a 
President and Congress who choose to pass a law forbidding 
the persuasion of men to join a union.” This was a very odd 
thing to worry about just after the triumph of John L. Lewis. 
However, Mr. Olney explained how foolish it was for labor 
to be cheerful about the future right to organize. He said: 
“It is no answer to this to say that such a thing could not 
happen in this country. It has happened elsewhere in coun- 
tries no less civilized than ours. It has happened in Germany 
and Italy.” 

Elsewhere in the article Mr, Olney pointed out that Ger- 
many and Italy were not the only countries we may come to 



54 T he Folklore of Capitalism 

resemble. We might also become like the South American 
republics, of whose judiciary Mr. Olney seemed to have a 
low opinion. The trouble with Germany, Italy, and the South 
American republics was that in their blindness they bowed 
down to the wrong principles, like the heathen. This, Mr. 
Olney thought, was hard on Germany, but it was a lucky 
break for us, because as a result labor and the underprivi- 
leged groups in this country could now see the dangers of 
getting what they want. 

Mr. Olney ’s analysis made the complex conditions in Eu- 
rope and South America simple and easy to understand and 
showed just why we are on the verge of becoming like these 
countries. 

The next article was by Louis A. Lecher, a distinguished 
member of the Milwaukee Bar. It was evident that he had 
been thinking along the same lines as Mr. Olney. However, 
he was more specific. The Potato Act was, he thought, not 
only an unwise agricultural measure, but also a subtly con- 
cealed attack on human liberty. 

George Wharton Pepper contributed an article in which 
he said of the President’s proposal: “Here the question is not 
whether A or B shall be elected to political office but whether 
A and B shall be deprived of their guaranties of civil and 
religious liberty.” 

He saw in the plan danger to labor and the Jews and the 
Catholics and the schools, and pointed out that professors 
like the writer were foes of education within its own house- 
hold, because they did not realize that the defeat of the plan 
was essential to academic freedom. He observed that “unless 
labor leaders, Jews, Catholics, educators and editors come to 
their senses before it is too late they will find themselves in 
an America which is anything but a land of the free.” 

Mr. Donovan then spoke. He analyzed the groups that 
were in imminent danger from the plan. They were religious 



T he Folklore of ig^y 55 

groups, racial groups, citizens o£ foreign descent, labor 
unions, and persons charged with crime. All of these people 
would, in Mr. Donovan’s opinion, be in a bad way if more 
justices were added to the Court under the plan. 

These symbolic arguments were almost identical with the 
arguments in the preceding presidential campaign, because 
they were the automatic response to the same kind of irrita- 
tion. This same pattern of argument always greets the strug- 
gle of any new organization to find a logical place among 
traditional institutions. 

Let us go back to the Middle Ages for our final example 
of this way of thinking. In the seventeenth century the Uni- 
versity of Paris, supported by an ancient learned tradition, 
with faculties of law, medicine, and theology, occupied a 
position in medicine not unlike the position of the Supreme 
Court of the United States in government today. It was the 
duty of these carefully chosen scholars to make a unified 
whole out of the learning of the time. They spent their lives 
studying those fundamental principles, the violation of 
which brings ruin. Their logic was as unassailable as the eco- 
nomic and legal logic of today. They had the same distrust 
of immediate practical advantage, the same fear of mysteri- 
ous and impending moral disaster lying in wait to destroy 
the national character of a people who deserted fundamental 
principles to gain present ends. The medieval physician could 
see no profit in saving a man’s body if thereby he lost his soul. 
Nor did he think that any temporary physical relief could 
ever be worth the violation of the fundamental principles of 
medicine. 

The remedy for fever established by the learning of the 
time was the art of bleeding to rid the body of those noxious 
vapors and humors in the blood which were the root of the 
illness. Of course, patients sickened and died in the process, 
but tliey were dying for a medical principle, so it was thor- 



56 T he Folklore of Capitalism 

oughly worth-while. To depart from that principle would 
have the same effect on human health as the failure to shoot 
strikers occupying the plant of an industrial concern in a sit- 
down strike, or as the tampering with the Supreme Court of 
the United States has today on social well-being. 

Magic had the same importance in the art of healing physi- 
cal ills in the Middle Ages that it has today in the determina- 
tion of governmental policy. Practical remedies, like sanita- 
tion, were not sufficiently mysterious to be respected. A 
people accustomed to living in filth had great faith in the 
curative properties of filth. There was more magic in dis- 
agreeable drugs than in pleasant ones, because disease was 
personified as an evil element that had to be attacked and 
driven away through some sort of combat in which pleasant 
remedies were a sign of weakness in the face of the enemy. 
The tactics in the war against disease bore a striking resem- 
blance to the tactics in the modern war against social prob- 
lems, in that the principles of medicine were much more 
sacred and important than the health of the patient. 

Such were the attitudes of those learned in medicine in 
1638 when the Jesuits in Peru discovered quinine. The cures 
which were accomplished by the use of this drug were mar- 
velous, due in part to its own merit and in part to the fact 
that patients escaped the bleeding process. It was natural that 
such a radical departure from established precedent should 
be viewed with alarm. Therefore, it was not surprising that 
the University of Paris declared the use of quinine uncon- 
stitutional and banned the drug as dangerous. 

The reasoning of the faculty was clear and persuasive. 
Since quinine did nothing to relieve the noxious vapors in 
the blo(xl, immediate benefits must necessarily be an “arti- 
ficial” cure or “panacea” which left the patient worse off than 
before in spite of his own temporary delusion that he felt 
better. The use of quinine was an attack on the whole funda- 



T he Volhlore of ig^y 57 

mental theory of medicine, which had been carefully cor- 
related with religion and theology. Certainly the temporary 
relief of a few sufferers could never be worth the overthrow 
of medical principles to the confusion of all the learning and 
experience of the past. They talked about it like this : “What 
is the emergency at present which should force the people to 
adopt the dictatorial rather than the democratic method for 
the solution of the very real constitutional problems which 
undoubtedly exist? There is none.” (James Truslow Adams, 
“The Court Issue and Democracy,” New Yor^ Times Maga- 
zine, February 21, 1937.) 

However, it was more than a medical problem. It was a 
moral problem which affected the character, the freedom, 
and the homes of everyone. Fortunately, the unlearned 
people of the time, like those of today, were constandy for- 
getting the great moral issues of the future for the practical 
comfort of the moment. Hence the use of quinine eventually 
became common. The significant thing, however, was that 
it had to be introduced by a quack who concealed it in a 
curious compound of irrelevant substances. 

In such an atmosphere there was at least a chance that a 
quack would be right ^ there was a certainty that a physician 
would be wrong. The Jesuits were considered by dieir ene- 
mies the most dangerous religious bureaucrats of the time, 
a fanatical group of zealots for whom the end always justified 
the means. They had made many people uncomfortable with 
their crusading. One could not adopt their remedies without 
adopting their principles any more than the United States 
today can develop national power without becoming like the 
Germans under Hitler. And so the dreaded specter of Jesuit- 
ism hung over the use of quinine, as Communism and Fasc- 
ism hang over soil conservation and crop insurance today. 

This way of thinking is as old as the desire of men to 
escape from the hard necessity of making practical judg- 



58 T he Folklore of Capitalism 

ments in the comfort and certainty of an appeal to priests. It 
controlled the thinking about the human body in the Middle 
Ages. It controls our thinking about the body politic today. 
Out of it have been spun our great legal and economic prin- 
ciples which have made our learning about government a 
search for universal truth rather than a set of observations 
about the techniques of human organization. 

Medieval Attitudes in haw and Economics 

The years before and during the great depression in Amer- 
ica, which were feudal in their economic organization, pre- 
sent a spectacle of a continuous search for a set of rational 
formulas designed to enable men to govern with a minimum 
of exercise of judgment, and with a minimum of personal 
power. The historian of the future will be amazed at a great 
people’s simple belief that sound legal and economic prin- 
ciples, discovered by close students of these mysteries, were 
the only means to national salvation. He will be equally 
amazed at the naive fears that opportunistic action or judg- 
ment based not upon learning but on political expediency, 
whatever its temporary benefits, would necessarily lead to 
disaster if it did not fit into some preconceived theory. The 
history of the time is the story of men who struggled gallantly 
and unsuccessfully to make government correspond to this 
theory about it. It is intelligible only if we start out with a 
bird’s-eye view of what men thought were the principles 
which made the social structure survive. 

We have already analyzed the conception of the “thinking 
man” which was essential to all political debate. Without 
him, public discussion of rational principles and systems of 
government would have been impossible. He was the great 
spirit which hovered over all governmental institutions. 

This particular type of folklore had ceased to affect medi- 



T he FolJ^lore of ig^y 59 

cine in 1937. Medical principles were not supposed to be a 
matter which was to be thought out, in the way govern- 
mental principles were thought out. The diflFerence between 
the attitudes of medical science and physical science was very 
subtle, particularly since the political scientist of 1937 always 
claimed to be doing the same thing as the physical scientist. 
That difference therefore cannot be defined; it can only be 
illustrated. 

Thirty years ago medical men were still fighting for prin- 
ciple, just as political men are fighting for it today. There 
were the homeopathic and the allopathic schools of medicine. 
The thinking man was supposed to choose between these two 
schools in hiring his physician. There was much public de- 
bate on their merits. Disciples of each school were supposed 
to stand together as a matter of party loyalty. They were the 
missionaries of a medical creed. 

Today the public is no longer asked to choose between 
conflicting medical principles (at least not to the same ex- 
tent). Medicine has been taken over by men of skill rather 
than men of principle. The medical sects, such as chiro- 
practic, which still argues fundamental principle in the way 
the political scientist argues it, are unimportant. There is 
little left in medicine for thinking men to debate. Physi- 
cians are chosen on a guess as to their expertness. Hospitals 
no longer take sides. Therefore the concept of the ‘‘thinking 
man” is no longer essential. 

In advertising the “thinking man” has gone so completely 
that a modern advertising agency would be amazed at the 
suggestion that the best way to sell goods is by making a ra- 
tional appeal. 

In government the concept still reigns supreme. Men are 
still asked to diagnose the ills of social organization through 
the darkened lenses of “schools” of legal or economic theory. 
They still worry about choosing a “system” of government. 



6o The Folf{lore of Capitalism 

Fact-minded persons who do not believe in the “thinking 
man” and who do not expect to gain political objectives by 
making rational appeals to him are not considered respect- 
able. They are called “politicians” and not “political scien- 
tists.” The political scientists are the high priests of our gov- 
ernmental mythology. The politician is still in the position 
of the Jewish money lender of the Middle Ages. 

In examining that curious folklore, still a powerful influ- 
ence in 1937, the future historian will observe that during the 
first half of the twentieth century the principles of govern- 
ment were divided into two great branches, law and econom- 
ics. Each had its specialists, who were supposed to work hand 
in hand in the joint enterprise of discovering the true prin- 
ciples of government. The law, on the one hand, preserved 
those great moral values of freedom and individualism by 
pointing out that the opportunistic action, which seemed best 
for the moment, often concealed dangerous moral traits. It 
was supposed to guard us against well-meaning individuals 
who, in their desire to alleviate human suffering and pro- 
mote efficiency for the present, were leading us into future 
bureaucracy, regimentation, and dictatorship. Economics, 
on the other hand, supplied the principles which, if properly 
studied, would make incoherent legislative bodies act with 
unity and coherence, and which, if properly propagandized 
among the solid citizenry, would insure the selection of 
legislators who could distinguish between sound and un- 
sound principles. Between the two sets of principles it was 
thought possible to avoid the personal element in govern- 
ment. 

The future historian will also mark the paradox that there 
was little agreement on what were the sound theories in 
1937, and at the same time almost unanimous agreement 
that good government followed only upon the selection of 
sound theories. No program for the alleviation of any press- 



T he Folklore of 7957 61 

ing problem could win any sort of acceptance without hav- 
ing behind it some theory logically consistent with the more 
general superstitions concerning the function of government. 
Men believed that there were several defined systems of gov- 
ernment — Capitalism, Communism, Fascism — which bright 
men had thought up and lesser men accepted, all of them in 
operation in various parts of the world. It was the duty of 
the American people to make a free-will choice between 
them. The great ideological battle in 1937 was whether Capi- 
talism was worth preserving. Most people thought it should 
be preserved. There were many intelligent humanitarian 
people, however, who thought that it should be abandoned 
and a new system inaugurated, usually called Socialism. This 
new system on paper seemed preferable to Capitalism. Yet it 
was constantly pointed out by its opponents that if one tried 
to obtain Socialism, one got either Fascism or Communism, 
with their attendant evils of regimentation, bureaucracy, dic- 
tatorship, and so on, and that individualism disappeared. 

It was a complicated business, this preservation of the capi- 
talistic system in 1937 against the other “isms” and alien 
ideals. There was first the task of defining what Capitalism 
really was. This was a constant process. It had to be done 
every day and each new restatement led only to the necessity 
of further definition. The preservation of Capitalism also re- 
quired that practical plans be tested by expert economic theo- 
rists who looked at each practical measure through the spec- 
tacles of economic abstractions, in order not to be confused by 
immediate objectives. Thus child labor had to be debated, not 
on the basis of whether it was desirable for children to work, 
but in the light of its effect on the American home in ten 
years, if it were followed to its logical conclusion. Measures 
for the conservation of oil, or regulation of agriculture, had 
to be considered without relation to immediate benefits either 
to oil or agriculture. Tendencies were regarded as far more 



62 T he FolJ^ore of Capitalism 

important than immediate effects, and the danger to posterity 
actually seemed more real than the danger to existing persons. 

The capitalistic system in America had two sets of rules, 
one economic and the other legal, determining what the 
limits of governmental control should be. Economic theory 
had no separate institution to speak ex cathedra, other than 
the two political parties, each of which hired experts to study 
it and advise them. Whatever was produced by any political 
platform had to have its background of scholarly research. It 
was the duty of each party to consult only sound economists. 
Legal theory, on the other hand, was manufactured by the 
Supreme Court of the United States. There were two parties 
in the Supreme Court of the United States, each with its own 
legal theory. However, it was generally agreed that what the 
majority of judges thought was the real essence of the Con- 
stitution. It was not left to the people to decide between 
sound and unsound legal theory, and therefore the opinions 
of dissenting judges, unlike the opinions of dissenting econo- 
mists, were not available in political debate, at least prior to 
Roosevelt’s attack on the Court. This was because law con- 
cerned the spiritual welfare of the people and preserved their 
form of government, whereas economics concerned only 
their material welfare. In spiritual things it is essential that 
men do right according to some final authority. There was 
thought to be no such compelling reason to prevent them 
from ruining themselves economically. 

The general idea of the Supreme Court’s function is repre- 
sented by the cartoon on the next page, in which the eco- 
nomic and social legislation of the day is thrown out of the 
august portals of the Supreme Court, stripped of the plausible 
humanitarian disguises which had deceived both the Presi- 
dent and Congress. This gives a very accurate picture of 
what the great mass of conservative people thought the 
Court was doing for them. They did not trust themselves to 



The Pol /{lore of 7937 63 

decide whether a humanitarian or practical scheme was really 
government by edict, or would lead to government by edict. 
They knew that such things seldom appeared on the sur- 
face, and that they required great learning to analyze. How- 
ever, more intelligent people required a more complicated 






m 




Cartoon by Herbert Johnson in the Saturday Evening Post, 
Reproduced by special permission. 


THANKS FOR THE HORSE-AND-BUGGY RIDE 


explanation, because they preferred long words to pictures. 
Hence the years of the depression produced thousands of 
learned dissertations, which came to every possible sort of 
conclusion as to the constitutionality of various measures. 
These articles did not make the law clear. They did, how- 
ever, make it clear that there was such a thing as law, which 
experts could discover through reason. 

It was this faith in a higher law which made the Supreme 


lWV 




64 T he FolJ^lore of Capitalism 

Court the greatest unifying symbol in American govern- 
ment. Here was the one body which could still the constant 
debate, and represent to the country the ideal of a govern- 
ment of fundamental principles. On this Court the whole 
ideal of a government of laws and not of the competing 
opinions of men appeared to depend. Here only was there a 
breathing spell from the continual din of arguments about 
governmental philosophy which were never settled. 

The legislative branches of the Government were under 
constant suspicion, and their acts were presumed to be ma- 
levolent. The incompetency of Congress was an assumed 
fact everywhere. The great trouble with the legislative 
branches was that they were influenced by an unlearned, un- 
theoretical, illogical, and often corrupt force called “politics.” 
Politics was continually putting unworthy persons in power, 
as opposed to business, where, because of economic law, only 
worthy persons rose to the top. A body influenced by political 
considerations could not give any disinterested judgment as 
to the soundness of any economic theory. Hence Congress 
was constantly picking unsound theories, listening to un- 
sound economists, and letting the practical convenience of 
the moment overweigh the needs of posterity. Politicians 
were the kind of people who would not care if a thing called 
bureaucracy was established as long as it gave them jobs. 

The only trustworthy check against unsound economic 
theory was not the politician, but that great body of thinking 
men and women who composed the better class of the public. 
Yet even such people were easily confused in those days when 
the noise of competing theories was loudest. The only way 
of straightening them out was by constant preaching, which 
had the weakness of all preaching throughout the centuries, 
in that sin and heresy were always rising against it. Hence 
the age-old cry of the disappointed preacher to his erring 
flock was constantly heard in the land. As typical of this, a 



T he Folklore of 65 

distinguished economist from Columbia University spoke 
the discouragement of his brethren in 1936 as follows: 

Need Realistic Warnings. — ^Professor Ralph West Robey, of 
Columbia University, appealed to professional economists to 
make more realistic warnings of economic disaster if present 
conditions continued. He had pointed out that, despite an 86 per 
-cent increase in federal revenue since 1932, the nation was faced 
with the largest peace time deficit in its history. He added that 
the cost of government in the United States is now about one- 
third of the national income, and that if this deficit were pro- 
vided for by taxation, the average per capita tax would be some 
20 per cent higher than that in England. 

But, he added, the public no longer listens to economists who 
foresee trouble ahead. 

Public Deaf to Warnings. — ^“The result has been,” he said, 
^‘that the public has ceased to be frightened when it hears econo- 
mists prophesying collapse and disaster. It has come to believe, if 
I may steal the phrase of a friend, that when an economist yells 
^Wolf! Wolf!!* it probably means nothing more significant than 
that the administration has pulled another white rabbit out of 
the hat. 

“Such a situation, it seems to me, is most distressing. I think 
it is distressing because I have the utmost confidence in economic 
reasoning and in economic principles.’* {New Haven Register, 
May II, 1936.) 

Economists generally felt in those dark days as Dr. Robey 
did. Here was careful scholarly work, leading to a set of 
theories which, if followed, would cure social disease as well 
as the imperfect nature of man permitted it to be cured. And 
here was an ungrateful public which would not listen to Dr. 
Robey’s sound economics. It might seem strange, therefore, 
to the reader, examining this most interesting folklore from 
a detached point of view, that the sound economists did not 
demand a Supreme Court of Economics. Why should they 
entrust to popular judgment this scholarly task, when they 



66 T he Fol\lore of Capitalism 

refused to entrust to popular judgment the somewhat easier 
task of legal reasoning? 

The answer to this question takes us into some of the un- 
examined religious assumptions which the folklore of 1937 
had in common with the Christian religion which was its 
heritage. It went back to the paradox of the relationship of 
sin and virtue, and the mystical nature of free will. God, ac- 
cording to an earlier theology, had his choice of making men 
keep to the straight and narrow path by discipline, or by 
persuasion. Weighing the advantages of these two different 
methods, he preferred to make him free to sin in order to 
make a more noble fellow out of him. Neither God nor the 
economists of 1937 desired a nation of slaves. Therefore the 
economists would have rejected as unthinkable the organiza- 
tion of a Supreme Court of Economics, on the ground that 
even a benevolent dictatorship is bad because it abolishes 
freedom. It had been evident for a long time that the only 
possible method of making laissez faire economics, or indeed 
any other planned system of economic principles work, 
would be to force people to accept them. But it was far better 
to trust to the feeble judgment of the common herd, and to 
guide them through love of virtue and fear of hell, of In- 
flation, or Bureaucracy, or Regimentation, or whatever name 
hell happened to have in the particular field of learning, at 
the particular time. Of course, the results were discouraging 
to the economists. They regretted man’s tendency to follow 
false economic reasoning, just as the preachers regretted 
man’s tendency to sin. Nevertheless, they felt that the only 
refuge was in a deeper search for the Word and in more 
fervent preaching. 

This was the way that most intelligent, socially minded, 
‘‘thinking men” thought. Of course, those who actually ran 
the Government were compelled to act on an entirely differ- 
ent set of assumptions. Politicians were interested in getting 



T he Folklore of ig^y 67 

votes, and such high-sounding theory had nothing whatever 
to do with the process. Everybody knew this, but it was re- 
garded as a shameful thing that it should be so. Therefore, 
the efforts of reformers were directed toward abolishing this 
distressing phenomenon. They argued that if men who did 
not stoop to use political tricks would only go into politics, 
and if people only would elect them, then political tricks 
would disappear from government. The efforts along this 
line achieved about the same success as the age-old effort to 
abolish sensuality from love. Everyone realized this, but con- 
sidered it no excuse for abandoning the effort. 

Law and Obedience to Authority 
There was only one area where the prevailing theory limited 
the operation of group free will. Men could choose between 
sound and unsound economic theories, but they must not be 
permitted to choose between sound and unsound constitu- 
tional theories. To prevent them from erring on this point, a 
scholargarchy was set up, with complete autocratic power. 
To a superficial observer, this might seem a denial of the 
beauty of group free will, but closer examination showed that 
it was not. For the function of the Supreme Court was not to 
prevent people from choosing what kind of constitution 
they desired, but to prevent them from changing their form 
of government without \nowing it. Congress in its igno- 
rance was constantly passing laws with purely practical ob- 
jectives, which really changed the constitution without giv- 
ing the people a chance to exercise their free will on that im- 
portant subject. Therefore, some autocratic power had to be 
set up to apply the complicated scholarly techniques to such 
measures, not to prevent the people from exercising their 
free will on the Constitution, but to prevent them from doing 
it inadvertently. 



68 T he Folklore of Capitalism 

Immersed in such theories, no student of government, eco- 
nomics, or law could look at the conduct of the institutions 
about which he was thinking without the same sort of nausea 
that an idealistic lover of bees and butterflies feels when she 
overturns a stone and sees some big black bugs crawling 
about in a loathsome manner. A similar attitude produced 
the same results in the study of government as it would have 
produced in biology. Facts about social organization of 
which men did not approve were not treated as facts, but as 
sins. 

From this point of view it became the duty of everyone 
to denounce organized political factions as low things un- 
worthy of the attention of courageous statesmen. Party plat- 
forms were the only reality — not the social and political pres- 
sures which force such platforms into a series of inconsistent 
compromises. The remedy was to ignore the pressures and 
make the platforms courageous and consistent. We were sup- 
posed to elect to office only those persons who did not care 
whether they were reelected or not. 

Of course, no political party could carry out these prin- 
ciples without political suicide, but this only meant that 
political parties were shot through with politics. Hence 
everyone demanded the kind of political party which thought 
more of posterity than getting votes for its leaders. Everyone 
realized, of course, that this was impossible, and the conflict 
created spiritual trouble, indecision, and a greater variety of 
literary and oratorical nonsense than the world has ever 
known heretofore. 

To find peace, men denounced government by men, and 
sought relief by reciting principles. The fundamental as- 
sumption of the folklore about government during the great 
depression was that principles could be more trusted than 
organizations. Organizations were dangerous because of 
their tendency to err and stray. Principles, provided that 



T he Folklore of 7937 69 

they were sound, endured forever, and could alone make up 
for the constant tendency of social groups to backslide. 

The Dawn of a Different Attitude toward Individual 
Maladjustments 

All this folklore persisted in a time when the theory of free 
will, sin, and repentance was disappearing from the thinking 
about individuals’ troubles. Psychiatrists and psychologists 
no longer explained individual conduct on the basis of a free- 
will choice between good and evil. Such a way of thinking 
had led in the past to curing the insane by preaching away 
the devil which had entered the patient. By 1937 people had 
lost interest in theoretical ethical principles for maladjusted 
individuals. The term “sinner” had gone from all sophisti- 
cated psychology. The concept of the devil had disappeared 
from the anatomy of the individual mind. Indeed, the idea 
that any man was a single integrated individual had disap- 
peared, and it was recognized that each individual was a 
whole cast of characters, each appearing on the stage under 
the influence of different stimuli. In diagnosing an individ- 
ual’s maladies, the psychiatrist found out what his fantasies 
were and, without bothering whether they were true or false, 
attempted to cure him by recognizing these fantasies as part 
of the problem. 

The psychiatrists, like physicians, were not concerned with 
the theoretical definition of the good mind, or the perfect 
human body. Even where they read of such definitions by 
their more theoretical brethren, they did not attempt to fit 
their particular patients into these molds. Ignoring the specu- 
lation of what the man would be in twenty years, or the effect 
of their treatment on posterity, they proceeded to make the 
insane person as comfortable and as little of a nuisance to 
himself and his fellow man as possible, from day to day. They 



70 T he Folklore of Capitalism 

did not spend their time deploring insanity, or the existence 
of psychopathic personalities. Their attitude toward their 
patients was rather one of intense interest. And in this atmos- 
phere curative techniques developed, and men actually 
learned. 

The Faith in Principles Rather than Organizations 

In 1937 there was little of this point of view in legal or eco- 
nomic thinking. The point of view of the psychiatrist had 
long been part of the stock in trade of that low class called 
politicians. However, the attitude seldom was in evidence 
when respectable people talked or thought about govern- 
ment. There were exceptions here and there in colleges, but 
that influence had failed to reach the minds of respectable 
editorial writers, forward-looking reformers, or molders of 
public opinion. The conception of social institutions as hav- 
ing free will, and winning their salvation by a free-will selec- 
tion of the right principles; the idea that politics, pressure 
groups, lobbying, powerful political machines existed be- 
cause people had sinful yearnings in that direction; the eco- 
nomic idea that depressions were the result of tinkering with 
economic laws and preventing the automatic working of an 
abstract law which would have functioned properly had it 
not been for bad men who threw this law out of gear these 
were held as articles of faith by conservatives and radicals 
alike. 

This faith, held so implicitly, was sorely tried during the 
years of the great depression. As in every time of great 
travail, from the great plagues on to today, prayers went up 
in all directions. These prayers, from businessmen, labor 
leaders, and socialists, had one clement in common. They all 
showed distrust of any form of organized control. No one 
would admit that man should govern man. No one would 



T he Folklore of 1957 71 

observe the obvious fact that lay everywhere under their 
noses, that human organizations rise to power, not by follow- 
ing announced creeds, but by the development of loyalties 
and institutional habits. All these devoted people thought 
that the world could only attain that state of static perfection 
which alone was worth aiming at, by studying and develop- 
ing the proper theories, and then following them, not by 
force, but by their own free will. Thus far the ideals of the 
Socialist party, the Liberty League, Dr. Townsend, and the 
budget balancers were all identical. The only difference be- 
tween them was the proper application of the general prin- 
ciples on which all right-thinking men agreed. 

The prayers of the house of bishops of industry were well 
illustrated by a typical speech of Mr. Sloan, at an annual 
dinner of the Association of Manufacturers in 1936. The 
speaker wanted American Industry, which he personified in 
a very beautiful way, to operate on an unselfish, or non-profit 
basis, and he wanted businessmen to assume the r 61 e of 
statesmen. The way to attain this was by making their minds 
pure and getting them to think about the right things. With- 
in the General Motors Corporation, of which he was Presi- 
dent, Mr. Sloan would never have substituted preaching 
for control. The lack of central control and the substitution 
of free will aided by preaching would have demoralized the 
concern within a year. However, it offered a marvelous in- 
tellectual escape for a man who felt the absolute necessity 
of business control, and at the same time could not fit actual 
control into his political religion. Portions of his speech 
which we have just analyzed are set forth, because they are 
so completely typical of the thinking of the day. 

At the annual dinner last night, in accordance with the custom 
of the National Association of Manufacturers, the guests of 
honor were introduced separately as men outstanding in the 
formulation of national industrial policy. 



72 T he Folklore of Capitalism 

Mr. Sloan, introduced as “one in the forefront of this group, 
delivered the address of the occasion, entitled “Industry’s re- 
sponsibilities broaden.” {New Yor\ Times, December 5, 1935.) 

He said in part: 

“Industry must further expand its horizon of thinking and ac- 
tion. It must assume the role of an enlightened industrial states- 
manship.^ To the extent that it accepts such broadened responsi- 
bilities, to that degree does it assure the maintenance of private 
enterprise, and with it the exercise of free initiative, as the sole 
creator, just as it must always be the most efficient creator of 
wealth. 

“During the past few years it has become the vogue to dis- 
credit every instrumentality of accomplishment, be it the indi- 
vidual or the machine. It has been said that American industry is 
selfish. It would be far more just to say that it has been pre- 
occupied — preoccupied in exploring the secrets of nature and 
creating a continuous flow of new products. 

“But, as we look forward, and as we analyze the evolution that 
has occurred, I am convinced that industry’s responsibilities can 
no longer be adequately discharged, however efficient and effec- 
tive it may be, with the mere physical production of goods and 
services. 

“First, let us ask whether our wealth-creating agencies, par- 
ticularly that of industry, are to be based upon private enterprise 
or political management. I cannot see how any intelligent ob- 
server can have any possible faith in the capacity of political 
management to provide either stability or progress, if it should 
set out to operate the agencies of wealth creation, particularly in- 
dustry. It is my firm conviction that any form of ‘Government 
Regulation of Industry’ is bound to result in an ever-increasing 
interference with the broad exercise of initiative — the very 
foundation of the American system. That is the natural evolution 
of bureaucracy. If that be so, might not the ultimate logical result 

2 Italics on this page, and all succeeding pages, unless otherwise indicated, 
arc the author’s. 



The Folklore of ig^y 73 

be the necessity for the socialization of industry through the 
break down of the profit system induced by the accumulative 
effect of the ever-increasing political management? We do not 
need to go far afield to see definite evidences of that possibility.” 
{New Yor\ Times, December 5, 1935.) 

The medieval idea, that just because sin had always existed 
and probably always would exist, we were not justified in re- 
garding it as commonplace or inevitable, was illustrated at 
the same meeting at which Mr. Sloan talked. In the platform 
of the organization it was pointed out that 

“The American System . . . offers greater assurance than any 
other of equality of opportunity for all men, with rewards in ac- 
cordance with the contribution of each.” By speakers during the 
day, the “American System” was contrasted with the New Deal, 
which was variously denounced as “an alien importation” and 
as ** an Oriental philosophy!* 

Government officials and legislators in general who had de- 
parted from the “American System” were denounced in the plat- 
form as having done so “in spite of their oath of office.” {New 
Yori{^ Times, December 6, 1935.) 

Nevertheless, this American system would only work, in 
the opinion of the convention, if the invisible government of 
politics were kept out. The convention noted with horror the 
existence of men of influence in government who had not 
been elected, and commented on it by resolution: 

A supplementary resolution later added to the denunciation a 
body otherwise unnamed called “the invisible government.” The 
resolution read in part: 

“It is a matter of grave concern that the germs of a dangerous 
invisible government have appeared in our national government. 
It is a matter of common observation that our governmental pow- 
ers, decisions and policies are being largely dictated by persons 
who have not been elected to official position and who are not re- 



74 The FolJ{lore of Capitalism 

sponsible to the people for their acts, decisions and policies. This 
is an unhealthy incubus in our national body politic which en- 
dangers the very life of our representative government and 
should be stamped out.” {New Yor\ Times, December 6, 1935.) 

In order to stamp out this invisible government by influ- 
ential men not elected by the people, it was obviously neces- 
sary for influential men not elected by the people to enter 
into the business of influencing government. Thus another 
resolution was introduced to this effect, the report of which 
is as follows: 

The “direct entrance” of industry into politics on this platform 
was declared to be a necessity by Charles H. Prentis Jr., president 
of the Armstrong Cork Company, who introduced it. Further, 
the declaration of entrance into politics the previous day by Clin- 
ton L. Bardo, president of the National Association of Manufac- 
turers, was implemented yesterday by S. Wells Utley, who had 
been selected to make a broadcast convention address on the 
political tactics to be followed. {New Yor\ Times, December 6, 
I935-) 

There were very many, of course, who considered the 
Chamber of Commerce and the Manufacturers* Association 
hidebound groups of selfish people, pursuing their own inter- 
ests under the guise of unselfishness. This attitude made the 
members of these organizations so speechless with indigna- 
tion that they constantly reiterated that they had become too 
frightened and angry to assume the leadership which the 
crisis demanded. Criticism of this kind impeded recovery 
by scaring the natural-born leaders into such a state that they 
could only hide in cyclone cellars. Unfortunately, however, 
the critics were also engaged in a search for the holy grail, 
and therefore their deliberations resulted in the same kind of 
a hunt for two things: heresy and corruption. As a result of 
this, Socialists split into two wings, and the believers in true 



T he FolI{lore of 1937 75 

principles ousted the non-believers at a stormy convention in 
Cleveland. They wanted no patching up of a capitalistic reli- 
gion. They wanted the true religion, if they had to go through 
chaos to get it. 

We are using these speeches only to illustrate a common 
belief that social remedies could be found in the formulation 
of principles rather than in control and organization. In this 
respect radicals and conservatives were exactly alike. 

Dr. Townsend belonged to the same church. He wanted 
goods distributed to the poor, but was convinced that the very 
worst way of doing this was to build a practical organization 
of human beings to do it. He, like his conservative foes, 
wanted an automatic scheme which would work for all time 
by encouraging free bargaining. His sole aim was to encour- 
age private initiative by creating a proper credit system. His 
scheme was no more nor less utopian than the laissez faire 
economics of the conservative wing of the great medieval 
church to which he belonged. It would have worked if hu- 
man beings had only been like the little abstract man in the 
back of his head. So also would laissez faire, if only human 
beings would leave things alone, and all act like good skilful 
traders who took their medicine when beaten, and did not 
try to overreach each other by unfair means. Thus we find 
Dr. Townsend endorsing a conservative general position in 
1936 as follows : 

Dr. Townsend, on the other hand, in addition to his funda- 
mental plan of paying $2oo-a-month old age pensions from the 
proceeds of a transactions tax, remarked that “there are many 
fortunes which will have to be dissipated by the income tax and 
the inheritance tax route.” 

To Fight “Dictatorship.” — “We are presenting a common 
front against the dictatorship in Washington,” said Dr. Town- 
send, showing a glint of gold teeth beneath his tiny mustache. 

“Add to that Communism and Farleyism, and you have our 



76 T he Folklore of Capitalism 

platform,” added the Louisiana preacher, a red-faced gentleman 
who talks in a succession of tub-thumping phrases. 

Dr. Townsend, who said that he considered the Supreme 
Court and the Constitution “a great safeguard,” said that Presi- 
dent Roosevelt “knew beyond doubt beforehand that his meas- 
ures were unconstitutional,” and that he had put them through 
in order to arouse resentment against the Supreme Court. Some 
one asked whether he believed the Supreme Court would find his 
proposals constitutional. 

“They will if it is shown that they represent the will of the 
great majority of the people,” replied Dr. Townsend in a grim 
tone. Later, however, he remarked that if it were possible to 
“capture the government” a constitutional amendment could 
easily be put through. {New Yor\ Herald Tribune, June 2, 

There is obviously nothing in these general principles to 
which the Liberty League could not have subscribed, in 
principle. There is a hint of breaking up large fortunes in 
both of them, in order to get back to the grand old days of 
free bargaining before large fortunes existed. In those days 
of the great depression everyone believed in the same God, 
and only fought about details of the service. 

In such a situation there was only one safe speech which 
could be made, and that was to invoke all religions at once, 
and lump them under the phrase, “moral conscience and 
integrity.” Such speeches, seeking the remedy through God, 
were therefore heard through the length and breadth of the 
land. Typical of them was the following from Governor 
Landon. 

In the stress and confusion of recent years and in the din of con- 
flicting counsel, we have lost our bearings and we have listened 
in vain for the commanding voice that might at once dispel our 
doubts and uncertainties and point us into safe courses. 

We have waited and hesitated, the courage and resolution of 



T he Folklore of i^yj 77 

old has seemed to fail us, and our moral fiber has seemed to 
weaken. 

There is peril in that situation. 

Our economic welfare may be threatened for the moment, and 
our industrial progress may be retarded for a season without final 
or total disaster. 

Far more serious is the possible collapse of character, a pos- 
sible paralysis of individual initiative, and a deadened sense of 
personal obligation and responsibility. . . . 

What is this intangible, yet very real thing we call the spirit of 
America? It may be found in the Bible. It is the slow groping of 
human thought toward the value of human personality and 
toward the one God in whose sight all men are equal. (New Yor\ 
Times, May 24, 1936.) 

Of course, the God to lead us out of OUf eccftomic be- 
wilderment was not always the God of the Church. Lawyers 
found one in the Constitution. Huge organizations like the 
Liberty League and the Crusaders sought the truth from this 
document and the learned decisions elaborating it. They pro- 
duced briefs, law-review articles, and sermons in publications 
devoted to the elucidation of the law. Like all great bodies of 
literature, the Constitution marched in all conceivable direc- 
tions. An inflation of legal learning took place, the like of 
which the world has never seen. In the Middle Ages, men 
sought the “Word” just as diligently, but the available ma- 
terial resources did not permit so many thousands to seek it 
at the same time, and the printing presses were not so efficient 
then as now. 

The Constitution, however, was only one symbol. Men 
feverishly attempted to make all written law march toward 
safety, security, and peace, through logical certainty. Millions 
were spent on restating all the law at once, and hundreds of 
learned men were employed by an organization called the 
“American Law Institute.” Prominent lawyers gathered 



yS T he Folklore of Capitalism 

from all parts of the nation to hear the law, as it ought logi- 
cally to be, read to them for their agreement and approbation. 

The purely religious character of these exercises was shown 
in the complete lack of selfish interest in nearly all of those 
who participated in them. They sought nothing for them- 
selves in this quest for simplified principle. No discourage- 
ment halted that search. Indeed, the obstacles were what 
made the search entrancing. The American Law Institute 
was ceremony of the very purest sort, dedicated to the ideal 
that this was a government of law and not of men. Some of 
the members of the Liberty League may have had a few 
selfish interests to further, but it is very doubtful if even 
these people thought about those interests direcdy, so ab- 
sorbed were they in the search for ultimate truth, so pre- 
occupied in contemplation of the future to the exclusion of 
the present. And in so far as the great membership of this 
institution was concerned, most of them were acting di- 
rectly against the common sense interests which they would 
instantly have recognized if the phobias which motivated 
them had been brushed aside. 

A poll of the Institute of Public Opinion showed that at 
least 30 per cent of even the unemployed men preferred the 
conservative to the liberal label. Persons on relief who had 
seen better days and were imbued with middle-class culture 
felt it only proper that they should be pauperized before aid 
was extended them. It was common to find persons who had 
gone bankrupt devoting the rest of their lives to working for 
their creditors. Some of these persons demanded new philoso- 
phies of government and became Socialists, or Communists, 
or whatnot. Few of them demanded with any articulate 
political force actual bread instead of religious principles. 
Only a few groups like the ex-soldiers, a few of the industrial 
leaders, and the politicians seemed to catch the beauty of the 
old proverb that “a bird in the hand is worth two in the 



T he Folklore of ig^y 79 

bush ” They achieved cash bonuses out of the tangled politi- 
cal situation, while most of their fellows were seeking 
symbols. 

The deep hold which this highly religious folklore had 
upon the small business or professional man, a majority of 
our industrial leaders, and our press is evidenced by the fact 
that in 1936 the Constitution became for them a sort of 
abracadabra which would cure all disease. Copies of the Con- 
stitution, bound together with the Declaration of Independ- 
ence and Lincoln’s Gettysburg Address, were distributed in 
cigar stores; essays on the Constitution were written by high- 
school students; incomprehensible speeches on the Constitu- 
tion were made from every public platform to reverent audi- 
ences which knew approximately as much about the history 
and dialectic of that document as the masses in the Middle 
Ages knew about the Bible — in those days when people were 
not permitted to read the Bible. The American Liberty 
League was dedicated to Constitution worship. Like the 
Bible, the Constitution became the altar whenever our best 
people met together for tearful solemn purposes, regardless 
of the kind of organization. Teachers in many states were 
compelled to swear to support the Constitution. No attempt 
was made to attach a particular meaning to this phrase, yet 
people thought that it had deep and mystical significance, 
and that the saying of the oath constituted a charm against 
evil spirits. The opponents of such oaths became equally ex- 
cited, and equally theological about the great harm the cere- 
mony might do. Nor was Constitution worship limited to 
upper strata. The Ku Klux Klan and similar disorderly 
organizations took the Constitution as their motto for the 
persecution of Jews and Catholics. In May, 1936, Michigan 
discovered a state-wide organization of misguided psycho- 
pathic personalities which had conducted a series of floggings 
simply because it was caught up by the solemnity of a ritual. 



8o T he Fol\lor€ of Capitalism 

No one could belong who did not take a solemn oath that 
he was a supporter of the Constitution. The most interesting 
fact about this order was that it was recruited largely from 
the underprivileged and the unemployed. 

Only radical parties refused to worship the Constitution, 
but the spirit of the age was such that they, too, put their 
faith in the written doctrines which they themselves had 
framed. Thus, the Socialist party, a group which could have 
no other conceivable purpose than to organize a protest vote, 
split wide apart in the crucial year of 1936 on purely theologi- 
cal doctrine. 

When in 1937 the President proposed to put more liberal 
Judges on the Court, liberals like Oswald Garrison Villard 
and John T. Flynn joined with the New Yor\ Herald Trib- 
une to denounce this sacrilege. A group of men with com- 
pletely irreconcilable views joined together in reciting the 
book of common prayer. 

The essential characteristics of this type of thinking may be 
described as follows : 

1. Everyone was so completely preoccupied with govern- 
ment as it ought to be that no action which was politically 
possible could escape condemnation in the terms of that ideal. 
Expediency was not a good public excuse for necessary im- 
perfections. 

2. Everyone was so much more concerned with the future 
life of social institutions than with the present that it seemed 
immaterial what happened to the legislation of the day di- 
rected only at temporary needs. Nothing could be considered 
really important unless it fitted into what was conceived to be 
the moral future of the nation. No one could quite explain 
what the moral future of the nation was, and therefore on 
such a question they were always willing to accept the word 
of any duly fonstituted authority whose remarks fitted their 
particular prejudices. 



T he Folklore of igyj 8i 

3. Everyone was more interested in the spiritual govern- 
ment than in the temporal. Temporal government consisted 
o£ business and politics. The theory was that these things ran 
themselves, the one being impelled by beneficent economic 
laws, which operated because o£ the inherent balance o£ hu- 
man nature, and the other being an invention o£ the devil 
which ran automatically because o£ the weakness o£ human 
nature. 

4. No one ever read the economic theory or the constitu- 
tional theory which kept the spiritual government in bounds. 
Nor was there any faith in any particular type of expert. The 
faith was in the pontifical nature of the utterances ex cathe- 
dra, and the belief in the centuries of learning supposed to lie 
back of them. Not everyone liked the particular set of such 
principles which happened to be uppermost. But they were 
convinced that further study and the elimination of politics 
from government would give them a set which they would 
like. 

The attitude which we have just been describing colored 
all thinking and all public utterance wherever the activities 
of government were concerned. It completely confused the 
activities of government by subjecting them to unreal stand- 
ards under which no human organization could operate. The 
election of 1936 brought out the fact that a very large number 
of people, roughly representing the more illiterate and in- 
articulate masses of people, had lost their faith in the more 
prominent and respected economic preachers and writers of 
the time, who for the most part were aligned against the 
New Deal. They repudiated the advice of the newspapers 
which they bought and read because they were more immedi- 
ately affected by the economic pressures of the time which 
were depriving them of security. Nevertheless, after the elec- 
tion, people continued to talk in the old phrases as before. 
The political leadership which was demanded was also re- 



82 T he Fol}{lore of Capitalism 

quired to be cast in old formulas and these old formulas con- 
tinued to confuse its direction. Although there were signs of 
a change in attitude everywhere, organized learning had not 
yet caught up. 

This summary of the state of things leads, naturally 
enough, to a discussion of the place of scholarship and learn- 
ing in the organization of society and in the distribution of 
its goods. 



CHAPTER IV 


T!he Place of Learning in the Distribution 
of Goods 

In which it is shown how the scholar, seeking for universal truth 
in the light of reason, guides the stumbling feet of a great mod- 
ern democracy, and in which the never-ending battle of these 
learned men against unsound theories and the selfish greed of 
politicians is also discussed. 

T he place of learning and scholarship in the dis- 
tribution of goods is a fascinating subject. We are 
talking, not about books containing technical in- 
formation, but about the kind of learning which supports 
the governmental folklore of people. This learning is sup- 
posed to disclose the fundamental plan of social organiza- 
tion and to lay down the principles which men must follow 
to make it live up to its ideals. 

Actually there has never been such a thing as a planned 
organization of society, even in times when there is the most 
social planning. Social plans are a symptom, not a cause. 
Goods are distributed, not through plans, but through habit 
and ceremony. Most of these ceremonies are not recognized 
as such and are thought to be expressions of fundamental 
truth. Their proper observance therefore is entrusted to the 
wise men of the tribe. There are two methods of observing 
these ceremonial truths found in every society. The first con- 
sists in parades of various sorts, the second in learned and 
mystical literature. In our modern rational age we think of 
the writing of books as more fundamentally sound than 
parades. The literature thus produced is called “learning” 
and “scholarship.” 



84 T he Folklore of Capitalism 

It is this kind of learning rather than the literature which 
attempts to convey technical knowledge that we are analyz- 
ing in this chapter. The difference between technical and 
philosophical learning, of course, cannot be sharply defined. 
An analogy therefore may be useful. The learning of medi- 
cine today is technical rather than philosophical. Therefore, 
every surgeon in his daily work must use books on the tech- 
niques of surgery. The literature of economics and law today 
is predominandy philosophical. Therefore, persons in actual 
control of cither political or business government do not use 
that literature in their daily operations. Our great govern- 
mental and industrial organizers cannot by any stretch of the 
imaginadon be classified as legal or economic scholars. 

They are not skilled in the literature of law and economics 
and do not read such literature. They prefer to hire other 
people to read it for them, taking great comfort in the fact 
that it is being produced in order to give stability to the gov- 
ernmental ideals on which their prestige is based. 

This type of learning which points out what men should 
be ashamed of in modern society because it deviates from 
sound principles is one of the most important props of our 
folklore. Its influence in molding the forms and ceremonies 
of our institutions is tremendous. It is a factor in creating 
sub rosa institutions which keep under cover the activities of 
institutions which are practically necessary but must be kept 
hidden because they violate our creeds. It is the ceremony by 
which creeds survive in spite of their conflict with reality. It 
is never a practical guide for day-to-day conduct in govern- 
ment or business. Nevertheless, it is the lifeblood of our ideals 
and myths without which we would feel very uncomfortable 
indeed.^ 

1 A sinj^le example will suffice. An eminent le^al scholar recently re- 
viewed a book written as a lawyer’s guide in trying cases. He concluded 
as follows: 

“Intended as a lawyer’s book, it will in all probability be read only by 



The Place of Learning in Distribution 85 

We are of course referring to the total effect of the learning 
of law and economics and not to particular lawyers or econo- 
mists. That total effect is produced because of a demand for 
rounded explanations of institutions, for ideals and for prin- 
ciples which will extend the culture of the present into the 
future. This kind of learning is not in any sense a present 
guide for either business or government. 

It is hard to convince lawyers or economists that this is true. 
Therefore, the place of learning in the distribution of goods, 
while a most important one, is not the one usually ascribed 
to it by scholars. Scholars like to think of the legal and eco- 
nomic principles which they formulate so laboriously as a 
practical guide. It is difficult to convince most of them that 
they are not practical advisers because when their guesses go 
wrong they can always ascribe the blame to factors such as 
human nature or politics, which lie outside their sciences. 
Therefore, the best way to understand the effect of modern 
legal and economic learning on institutional conduct today 
is to compare it to the effects of similar scholarly learning 
about medicine in the days when that science was still pre- 
dominantly philosophical rather than technical. 


lawyers and those who would be lawyers. And fervent prayers that the book 
be read by no others should be raised by those who want to believe, and 
want others to believe, that a law suit is a proceeding for the discovery of 
truth by rational processes. If only some lawyer could rise up and honestly 
denounce Mr. Goldstein as a defamcr of his profession! If only Mr. Gold- 
stein himself had written his book as an exposition of the evils inherent in 
our adversary system of litigation! If only a reviewer could assert that this 
book is a guide not to the palaces of justice but to the red-light districts of 
the law! But a decent respect for the truth compels the admission that Mr. 
Goldstein has told his story truly. He has told it calmly, without pretense 
of shame, and (God save us!) without the slightest suspicion of its shame- 
fulness. He has shown by his own unperturbed frankness with what com- 
plaisance the profession, which would smile the superior smile of derision 
at the suggestion of a return of trial by battle of bodies, accepts trial by bat- 
tle of wits. In all innocence, he has produced a document which is a devas- 
tating commentary upon an important aspect of our administration of jus- 
tice.” (E. M. Morgan, Professor of Law, Harvard Law School, 49 Harvard 
Law Review 1387, 1389, reviewing Trial Technique by Irving Goldstein.) 



86 T he Folklore of Capitalism 

Scholarly medieval thought about medicine (like scholarly 
thought today about government) developed elaborate theo- 
ries but no efficient techniques. Such surgical techniques as 
existed were the property of an unlearned class, the barber 
surgeons, who were not respectable. Respectable physicians 
could not tolerate the thought that the actual human body 
was not a philosophical and religious creation, not unlike a 
constitutional government, designed with omniscient fore- 
thought by a Providence which had a purpose in creating 
each detail. They wanted rounded and complete explana- 
tions for everything, and ignored or condemned observed 
facts in conflict with such explanations in the same way that 
thinking about social institutions today ignores the actual 
disorderly ways of group conduct which interfere with the 
picture of society obtained from rational theories. Things in 
conflict with rational theory were therefore set down as the 
work of the devil. 

In this kind of atmosphere the more the men of the Middle 
Ages studied the body, the less they knew about it. They 
ignored practical needs; they sought comfortable intellectual 
certainties while epidemics rose and fell without any sort of 
human control. Today we are without moral preconceptions 
when we control physical epidemics; but we are still fettered 
with them when we consider social problems. 

This contrast between two attitudes comes into clearer re- 
lief when modern treatment of venereal disease is examined, 
because these are the only physical epidemics still treated 
from a medieval point of view. There is no question but that 
the present ravages of these diseases could be tremendously 
reduced. Proof of that is found in the record of the United 
States Army in France. Yet such a solution means that we 
must recognize an obvious natural fact about human beings 
which interferes with both reason and morals. To the moral 
man of the twentieth century, there is a vast difference be- 



T he Place of Learning in Distribution 87 

tween smallpox and venereal disease, because smallpox is not 
the result of sin. 

Nearly all of the literature of government is produced in 
that kind of moral atmosphere. Such an atmosphere produces 
doctrine which becomes much more important than practi- 
cal needs. The emphasis is on the future rather than the 
present. This has profound effects on the day-to-day activi- 
ties and personnel of our institutions. Some of these effects 
we will attempt to analyze. 

The Contribution of Scholarly Learning about 
Government to the Rise of Quacl^s 

A MOST significant effect of our scholarship and learning 
about government today is to remove from active participa- 
tion in governing most of the kindly and tolerant people who 
might otherwise be a more important factor. Accordingly, 
important social changes often owe their impetus to quacks. 
In a contest between experts in governmental organization 
and political machines, the latter usually win. 

The reason is that our students of governmental problems 
consider politics a low and unworthy pursuit. They think 
that sincerity and candor can be used in a political campaign. 
They feel a sort of spiritual trouble when confronted with 
the realities of a political situation, which makes them con- 
fused and ineffective. Unscrupulous persons who do not feel 
the same spiritual trouble when confronted with things as 
they are naturally become more proficient. The so-called 
demagogue has an advantage because he does not view the 
control of human institutions under the illusion that men in 
groups are composed of so<alled thinking men, to whose 
knowledge of fundamental governmental principles he must 
appeal. 

The student in government is therefore usually impracti- 



88 T he Folklore of Capitalism 

cal, because all his acquired learning makes him so. He 
knows the right principles, and attempts to apply them by the 
preaching method. He knows no more about the techniques 
of organization than the medieval physician knew about the 
organization of the human body. 

The influence of political quacks on social events in such 
an atmosphere is tremendous. They are the only persons who 
can espouse a growing social need before it is recognized by 
conservatives. Responsible labor leaders like John L. Lewis 
find serious handicaps in their way because they can obtain 
support neither from their intelligent conservative friends, 
nor from the radicals. For example, in the conflict to recog- 
nize collective bargaining, it was difficult indeed for any 
responsible conservative to treat the situation realistically. 
The burning issue was supposed to be whether sit-down 
strikes should be put down as an attack on government. Until 
this religious problem was solved, the real problem had to be 
ignored. The result was, of course, that a more irresponsible 
group became the most effective labor leaders and labor or- 
ganizations were hard for even Lewis to control. 

The same process may be observed before the passage of 
the Social Security Act. In a time when the practical problem 
of old-age relief was obscured by moral issues — when the 
moral character of the aged was more important than their 
physical wants — when distribution of goods to them, even 
though they were surplus goods, could not be justified under 
a profit economy, quacks could lead the most effective cam- 
paigns. In such an atmosphere it required a Dr. Townsend 
to compel the acceptance of old-age pensions in both political 
platforms of 1936. Sensible people had recognized the need 
for years, only to be drowned out by a flood of abstract eco- 
nomic argument. Dr. Townsend was successful because he 
linked the idea of old-age security to the prevailing popular 
economic conceptions. Men were afraid of central organiza- 



T he Place of Learning in Distribution 89 

tion, and hence Dr. Townsend avoided Communism. Men 
wanted automatic schemes based on laws of. supply and de- 
mand, hence Dr. Townsend gave them an automatic scheme. 
They thought of distribution and income in terms of money, 
and the Townsend Plan conformed to that. It was compli- 
cated, and one could write great books about it, thereby satis- 
fying the need for learned authority. The Townsend Plan 
then became a movement which transcended in actual im- 
portance all the more sensible schemes of accomplishing the 
same object. In the thinking of economists Townsend was 
regarded as a dangerous phenomenon. He was attacked on 
logical grounds which are entirely irrelevant to the part he 
was playing in the social scene. Only in the thinking of sub 
rosa political machines was there a practical understanding 
of the nature of the movement and how it must be dealt with. 
Without his leadership the passage of the Social Security Act 
might have been delayed for years. 

And this leads to the completion of the story of Peruvian 
bark, or quinine, which was started in the second chapter. 
After the University of Paris had banned the remedy, on the 
double ground that it led to Jesuitism and was only an arti- 
ficial and temporary cure, a quack named Talbot conceived 
the brilliant idea of mixing Peruvian bark with other in- 
gredients, such as honey, and putting it out as a secret pana- 
cea. He gave it a new name and sold it under a theory which 
did not conflict with the rational ideas of the time about the 
cure of fever. Naturally enough his cures were marvelous, 
because he was competing with the therapeutics of bleeding 
which had been so carefully reasoned out by the savants of 
the time. Finally he cured the Dauphin. He was offered a 
princely sum to disclose the secret, but he was too wise to 
accept. Instead he obtained a patent of nobility and a large 
annuity in return for his promise to disclose the contents of 
his remedy after his death. Ten years later he died and the 



90 T he Folf{lore of Capitalism 

learned men of the time found that it was the despised Peru- 
vian bark which had been the foundation of the career of this 
distinguished medical statesman. It was only thus that medi- 
cal remedies could triumph over the learned superstitions of 
the seventeenth century. It is thus that political remedies 
triumph over the learned superstitions of today. It is a cum- 
bersome and painful process, but the honest observer must 
record it and the practical politician must take it into ac- 
count. Taboos do not mean that a nation ceases to progress. 
They only mean that it advances in devious ways with most 
of its cylinders missing. 

This is beautifully illustrated in the testimony of Benja- 
min Marsh during the Senate Committee hearings on the 
Black-Connery wages and hours bill. Mr. Marsh was criticiz- 
ing the bill from a technical point of view. Nevertheless as a 
realist he was in favor of it, even in the form submitted, as 

shot in the arm.'* He said : '7 believe in taking the shot, be- 
cause you have to do all the fool things before you do the 
sensible things. , . (Author’s italics.) 

T! he Effect of Philosophical Learning on 
Political Compromise 

The search for rational and moral principles creates an at- 
mosphere where compromise is difficult in times of change. 
Most of the interesting and picturesque wars have been 
fought not over practical interests but over pure metaphysics. 
The greater the philosophical learning of the time, the more 
difficult it is for a new organization to find a place in the logi- 
cal structure of government. The reason is that once men 
have articulated a creed their desire for consistency and their 

^ Joint Hearings before the Committee on Education and Labor of the 
United States Senate and the Committee on Labor, House of Rcprcscntotivcs, 
75th Congress, ist Session, on S. 2457 and H.R. 7200, June 7"'i5» *937» 
p. 552. 



The Flace of Learning in Distribution 91 

loyalty to authority arc generally greater than any praaical 
motivation. 

To give a simple illustration, let us compare the Supreme 
Court of the United States with an administrative tribunal. 
The Court, since it represents finality in learning and re- 
search, cannot change without appearing to discard all its 
authoritarian pretensions. Where it takes an erroneous 
course, it is very difficult for it to change to another route. 
Compare this to an administrative tribunal, which is a lower 
form of institutional life. Such a tribunal has technical in- 
formation but no great literature. Therefore, when we desire 
elasticity and compromise in any field we take jurisdiction 
away from courts and give it to administrative bodies. Yet 
even administrative bodies lose their elasticity as they de- 
velop learning and doctrine. 

This process in the individual was illustrated by an experi- 
ment carried on by the late Professor Edward S. Robinson 
of Yale, during the latter part of the Hoover Administration 
when the depression had thrown governmental philosophy 
into confusion. He submitted to a group of several thousand 
persons, composed of members of the League of Women 
Voters, professors, readers of liberal magazines, and so on, a 
series of inconsistent statements of economic and political 
belief. The statements were so arranged that the inconsisten- 
cies were not apparent except upon close analysis. In general 
they represented two attitudes — one that the Government 
should take a large control over the distribution of goods and 
the other that it should allow the problems of society to be 
solved by the working of national economic laws. 

Professor Robinson asked his subjects to mark the state- 
ments as follows: “True,’’ “Probably True,” “Undecided,” 
“False,” “Probably False.” 

After these answers had been handed in, the group lis- 
tened in widely separated parts of the country to radio 



92 T he Folhjore of Capitalism 

speeches of a learned character in which prominent men, 
using the benefits of statistical and scholarly research, dis- 
cussed the public issues of the day. Weeks afterwards, when 
the speeches were finished, the group was given the same 
questions to mark again. 

It was found on tabulating the results that scarcely anyone 
who listened to the speeches on both sides had changed any 
of his answers from “True” to “False” or even from “Prob- 
ably True” to “Probably False.” In other words, the discus- 
sion had scarcely any effect in altering the underlying reac- 
tions of the members of the group to the statements of policy. 
There were numerous changes but they were from “Prob- 
ably True” to “True” or from “Probably False” to “False.” 
What had happened in the minds of these listeners? They 
had been leaning in a given direction. They had heard a 
phrase which gave authority and learning to that direction 
and their uncertainty was changed to certainty. They had 
lost their tolerance and become uncompromising. They had 
found the truth which they thought they were seeking and 
were now ready to fight for it. 

The effect of the scholarly elaboration of principles on com- 
promise with practical necessity appears most clearly in revo- 
lutionary situations, where learned idealists seize power. The 
rise of uncompromising theorists is generally a direct result 
of the devoted belief of conservatives that there should be no 
compromise with principle. When men are excited, their 
devotion to logic and principle leads to violence. Security and 
order only come when practical politicians replace learned 
and idealistic men. 

The seeds of the Russian Revolution were sown by learned 
theoretical idealists, who dreamed of a logical order accom- 
plished by a preliminary period of disorder. These men, dur- 
ing the dark days of the Czar, were occupied in writing dull 
and complicated books. Their literary output consisted in 



The Place of Learning in Distribution 93 

large part of theological elaboration on Karl Marx. They 
used the ritual of scholarship to surround their revolt with 
the air of sound research and theory. In the first part of the 
revolution men who had not written learned treatises had 
difficulty in getting high positions in the new regime. In the 
course of time the learning which had occupied the revolu- 
tionists finally gave way to the dictatorship of a practical 
politician. 

T he Effect of Learning in Ma\ing Men Treat Ideal 
Conceptions of Society as Concrete Realities 

Since the philosophical learning about government is the 
product of a demand for certainty and for a symmetrical and 
concrete explanation of social phenomena, it must leave out 
the complicated psychological factors which make organiza- 
tions grow and develop in the same way as individuals. For 
this reason most of the learning is pure fantasy logically and 
mathematically developed. The process is to take an analogy 
which seems to march toward a preconceived conclusion and 
assume that it accurately pictures a social institution. Then 
“learning” about the situation pictured by the analogy is sub- 
stituted for observation of the actual complicated events un- 
der discussion. We cite a column from one of the most 
learned economic pundits of the time, Walter Lippmann. He 
had an emotional bias against the exercise of national power 
to solve national problems. He converted that emotional 
leaning into certainty by pretending that the separate states 
were like physical or chemical laboratories, dealing with eco- 
nomic problems as a scientist deals with physical experi- 
ments. The notion that our checker squares of states were 
economic units or that they had the power to conduct experi- 
ments or that the experiments they conducted could be uti- 
lized by other states is of course pure daydreaming. And yet 



94 Fol\lore of Capitalism 

wc find that daydream used as a factual argument in a way 
typical of the thinking of the day. Walter Lippmann wrote; 

For the great virtue of the Federal system is that each state be- 
comes, as the late Senator Dwight W. Morrow used to say, a 
laboratory in which the other forty-seven states can see how theo- 
ries actually work when put into practice. No one state, however 
foolishly it legislates, can injure the nation as a whole, and the 
follies of one state are almost certain to teach wisdom to the 
others. A judicial interpretation of the Federal Constitution 
which denies to the states the power to experiment within wide 
limits makes the system as a whole far more rigid, far more uni- 
form, than it can safely be made. 


It will be particularly unfortunate if the states arc to be pre- 
vented from trying out locally experiments in the fixing of prices 
and wages. For it must be recognized that there is a large body of 
popular opinion which favors such measures, and if that opinion 
is mistaken, as many of us believe, by far the best way to demon- 
strate the error is to let such measures be tested out practically here 
and there. This is the least cosdy and the surest way of reaching a 
decision. 

No state can in fact regulate drastically many prices or wages. 
If it docs, it will quickly feel the effects of competition from other 
states. Thus the freedom of the states to police local industries is 
almost certain to be exercised only where the abuses are so ob- 
vious that no one can or will defend them. The states can never 
carry regulation to the point where the government, as the arbiter 
of all wages and prices, has destroyed the reality of freedom of 
contract. 

No such check would exist If the Federal government had the 
kind of power claimed for It under N.R.A. or the Guffey act. 
We should find ourselves quickly under the iron rule of national 
collectivism. But the separate states could not, even if they 
wished, revolutionize the American social order. They can attack 
only the gross abuses of free competition where they injure those 



The Place of Learning in Distribution 95 

who cannot effectively defend themselves. {JSlew Yor\ Herald 
Tribune, June 2, 1936.) 

The argument that state governments watch the legislation 
in other state governments as experiments are watched in the 
laboratory is, of course, the sheerest fantasy to anyone who 
knows how state legislation actually operates. The pure 
fantasy of the notion was ironically illustrated by the follow- 
ing news item which appeared on the previous day. 

Rand Closes Big Plant at Middletown. Strike Results in 
Orders for Discontinuance of Factory. Mayor to Seek Com- 
promise. Middletown, June /. — ^Less than 100 striking employes 
were around the Remington Rand factory here this morning as 
workmen took down the sign on the building and factory offi- 
cials announced that the plant has been closed. 

While workmen prepared the machinery in the factory for 
shipment, the strikers gathered in St. Aloysius Hall to discuss the 
situation. A week ago, they went out on a “sympathy” strike in 
protest to the discharge of 16 union employes at the Syracuse 
factory. Today, they faced the possibility of a $2,000,000 per year 
payroll leaving Middletown. {New Haven Register, June i, 

The mobility of our great industrial organizations and 
their independence of state lines had been carefully studied 
by Carter Goodrich and others in a report, Migration and 
Economic Opportunity? Yet the theory that states were ex- 
perimental laboratories still persisted. Men argued seriously 
that states could control agricultural conditions, though they 
had not the power to exclude competitive agricultural prod- 
ucts from other states. Administrative divisions which were 
in no sense economic units were supposed to be able to act 
like economic units. 

When this was pointed out to men like Mr. Lippmann, the 

® University of Pennsylvania Press, 1936. 



96 T he Folklore of Capitalism 

answer usually was that great monopolies should be broken 
up. This slogan had wide popular appeal and was backed by 
an enormous literature of learning, both legal and economic. 
The obvious impossibility of this idea was explained away by 
the theory that it should be done step by step, just as the re- 
turn of the horse to replace the automobile would have to be 
accomplished. The country was supposed to go back gradu- 
ally, through the different makes, back to the old Model T 
Ford, until finally they had the little automobile which really 
was inferior to the horse. Then they would eagerly embrace 
the horse. Thus antitrust laws became popular moral gestures 
and their economic meaninglessness never quite penetrated 
the thick priestly incense which hung over the nation like a 
pillar of fire by night and a cloud of smoke by day. 

The quaint moral conceptions of legal and economic learn- 
ing by which the needs of the moment could be argued out of 
existence were expressed by ‘long run” arguments. Such 
arguments always appear in religious thinking. From this 
point of view the future is supposed to be the only reality, just 
as Heaven in the Middle Ages was the only reality. All 
else is regarded as temporary, shifting, and ephemeral. This 
way of thinking allows men to ignore what they sec before 
them in their absorption with the more orderly blueprint of 
the future. Observe how the New YorI{ Times proves edi- 
torially that new techniques and machinery do not throw 
men out of employment because they do not do it “in the 
long run.” Therefore, there is no real present problem. 

Progress and Jobs. — ^In his speech in New York on April 26 the 
President criticized the contention of an unnamed economist that 
recovery could be achieved by lower prices brought about by 
lowered costs of production: 

“Let us reduce that [he said] to plain English. You can 
cheapen the costs of industrial production by two methods. One 



T he Place of Learning in Distribution 97 

IS by the development of new machinery and new technique and 
by increasing employe efficiency. We do not discourage that. But 
do not dodge the fact that this means fewer men employed and 
more men unemployed. . . . Reduction of costs of manufacture 
docs not mean more purchasing power and more goods con- 
sumed. It means just the opposite.” 

If this astonishing doctrine were true, then everything that we 
have hitherto called industrial and economic progress, every new 
invention, every move to increase productive efficiency, would be 
a cause for alarm. Fortunately, the whole history of industry 
proves that it is not true. If it were true, serious unemployment 
would have begun to set in with the Industrial Revolution in the 
eighteenth century, and would have piled up year by year with 
each new labor-saving device, regardless of the general ups-and- 
downs of the business cycle. Instead, we know that mechanical 
progress has created scores of jobs for every job displaced, and 
that it is the chief reason why American are incomparably higher 
than Chinese wages. The displacement of jobs by new machinery 
falls upon small special groups. It is our social duty to make 
provision for these groups. But much larger groups are benefited 
as consumers by the reductions in prices which more efficient pro- 
duction brings about; this leads to increased purchases of goods 
and hence to increased employment. (May 27, 1936.) 

This is a beautiful example of the “long-run” argument. 
Because machinery does in the long run promote higher 
standards, it is assumed that anyone pointing out a present 
problem caused by technological improvements is making 
an attack on the permanent utility of such improvements. 

In this way an industrial economist could prove that a 
hundred particular individuals who had been discharged be- 
cause of the introduction of machinery had not really been 
discharged at all because of the laissez faire heaven which lay 
in the future.^ 

^For example, the Ford Motor Company distributed a pamphlet en- 
titled Machines and fobs by W. J. Cameron, December i, 1935, at a time 



98 T he Folklore of Capitalism 

It was the same way with housing. The vast housing proj- 
ects in England were envied but not imitated. In 1936 for- 
mer Senator Straus of New York had been appointed by 
Mayor La Guardia to find out how England was solving the 
housing problem. He discovered that the English had been 
building houses by government subsidy, in spite of the fact 
that their per capita national debt was much larger than ours. 
A building boom had developed, and the subsidy was being 
gradually withdrawn. The fact that it was being withdrawn 
showed, of course, that it was wrong in the first place, be- 
cause it was not a permanent cure. But there were other con- 
vincing reasons why the English practice should not be fol- 
lowed. We must not permit our Government to act until it 
has developed a civil service like that of England. As the 
New Yor}{ Times put it: 

when technological unemployment was a very serious problem. Mr. Cameron 
proved it was not a problem at all by pointing to the distant future. He said: 

“No one could be indifferent to the charge that machinery diminishes 
employment. But it was never easy to understand how anything so useful 
to man could also be as harmful as was alleged. We hear the charge less 
often nowadays because the conviction is growing that it is not true. 


"It always surprises people to learn that most of the machinery in use 
is not labor-saving machinery at all. Most of it is labor -creating or labor- 
serving; it enables men to work at tasks that never would have been at- 
tempted otherwise. 


^*Rcgarding so-called ‘technological unemployment,* there is no possible 
way of rendering human beings obsolete. Rarely docs a new industry en- 
tirely displace an old one.’* 

This was said when millions of people found themselves so obsolete 
that there was no place for them. However, Mr. Cameron, like all medieval 
priests, referred the unemployed to the beauties of the future world. The 
method here is clear. It consists of regarding an observation of the obvi- 
ous, that a new machine has put some actual men out of work, as an at- 
tack upon the machine itself. Then the argument proves that the machine 
is a good thing. Since it is a “good thing,** it cannot be possible that it hat 
thrown anyone out of work, because only “bad things** do that. 



The Place of Learning in Distribution 99 

By these and other devices more than four million slum dwellers, 
according to Mr. Straus, have been rehoused in buildings erected 
with Government aid since 1919. If we are to achieve like results, 
he argues, we must “tread the same path.” It may be wondered 
just how literally he intends that advice to be taken. Certainly it 
would be a fine thing if we could emulate British administrative 
technique, so steady, self-reliant, well informed and free from 
political manipulation. (October 21, 1935.) 

Therefore, the best way to build houses is to attack Mr. 
Farley for his political manipulation of the civil service. 

Mr. Hoover put the same idea in more general terms as 
follows: 

Every spread of bureaucratic control that makes men more sub- 
jective or dependent on government weakens that independ- 
ence and self-respect. National stamina suffers by encouraging 
parasitic leaners whether on doorsteps or governments. There is 
self-respect and dignity that marks free men. 

Honor in public life begins with political parties. The people 
must depend upon political parties to carry out their will. When 
men are elected to high office on certain promises and those 
promises are cynically broken, how may we expect a citizen to 
feel the obligation of a promise and good faith? {J^ew Yor\ 
'Times, May 15, 1936.) 

Here was the notion of making political parties better and 
better by imposing on them consistency to written docu- 
ments, and inspiring them with vague terror of governmen- 
tal action of any kind. This creed imposed impossible stand- 
ards on the Government because it required that every prac- 
tical action be undertaken by a debating society. It imposed 
impossible standards on political parties because it required 
absolute foreknowledge of the future in preparing their 
written documents. It made adherence to written documents 
the first law of government, above and beyond any practical 



100 T he Fol\lor€ of Capitalism 

considerations. Not everyone believed this, but such was the 
atmosphere o£ the times that no candidate for political oflSce 
could safely have denied this nonsense in public. 

Obviously, no one could win debates conducted in such an 
atmosphere, because each set of principles always seemed 
conclusive to its own adherents. As a result, compromise was 
made difficult because the debate was shifted from the un- 
certainties of affairs to the certainties of opposing schools of 
learning. Conflicting interests, unencumbered by doctrine, 
can always be settled by horse trading. But no man of intel- 
lectual integrity will compromise with a fundamental prin- 
ciple after he has thought it through. 

The Effect of Philosophical Theory on the Treatment 
of Practical Problems 

The historian of the future, writing of the place of scholarly 
learning in the operation of social institutions during the 
great American depression, will observe that each theory 
sired a competing theory; each elaborate definition com- 
pelled other definitions. Law became a subject of bewildering 
complexity, in the mazes of which simple and practical prob- 
lems were removed from the sphere of practical judgment of 
men. Economics took over higher mathematics. Each social 
science was a pyramid of abstract theory, imposed upside 
down on some simple myth believed by the man in the street. 

The result of this devotion to theory was to obscure practi- 
cal necessities and to prevent the alignment of groups ac- 
cording to their actual interests. It was impossible to form 
political parties to represent the interests of different eco- 
nomic groups because everyone believed in the same slogans 
and refused to talk about practical affairs. Therefore, party 
platforms in America were practically identical, except for 
minor detail. In the year 1936 it began to appear, in spite of 



T he Place of Learning in Distribution lOl 

the bitterness of the coming campaign, that they would again 
be identical. Sincere thinkers like John Dewey and ably 
written, intelligent papers like the New Republic, the Na^ 
tion, and Common Sense were constantly demanding a third 
party. Yet, in spite of the apparent need for a party which 
represented different interests and different issues, none came 
into being and every attempt to form one failed. 

The reason was obvious. Everyone belonged to the same 
church. Everyone believed in a written Constitution and a 
Supreme Court to save the nation’s soul, and in the existence 
of sound economic principles discovered by impartial learned 
men in colleges to cure its body. And, above all, everyone 
believed in a government of principles and not of men. The 
idea that different classes of the country really had opposing 
interests, that they were not all working hand in hand toward 
the same goal — i.e., justice under the capitalistic system — 
never took any emotional hold on any extensive group. A 
separate labor movement was regarded as dangerous even 
by a large section of labor. This curious unanimity between 
the industrial East and the agricultural West, between the 
Republican North and the Democratic South, between labor 
and industry, and even between the rich and the- unemployed 
began to be apparent when polls were first taken on current 
economic slogans, rather than on specific candidates. 

For example, in 1936 the Institute of Public Opinion, a 
scholarly and impartial group, took a nationwide poll on the 
question of the necessity of balancing the national budget. 
This was in a time when it was obvious to any fact-minded 
person, not caught in the symbolism of the time, that in 
terms of the distribution of material goods there was no sense 
whatever in cutting down the distribution of comforts to 
the unemployed, or housing, or any form of activity leading 
to the utilization of the productive capacity which was at 
hand. We were rich, not poor, in those things which the 



102 The Folklore of Capitalism 

economist called wealth. Budget balancing meant, in practi- 
cal terms, that, for the present at least, many people would 
have less to eat, poorer houses, less electricity, and so on, in the 
face of an abundance. Yet even in such times an overwhelm- 
ing majority of those who voted in the poll, rich and poor, 
agricultural and industrial, voted that the primary need of 
the Government was to balance its budget. 

Of course, the budget was not balanced because the inter- 
ests of the various groups who voted to balance it were dia- 
metrically opposed. Each demanded a different sort of gov- 
ernmental economy. The West would have opposed the 
tariff subsidy, the East would have denied a farm subsidy. 
Veterans were forming groups to see that relief to unem- 
ployed, particularly radicals, was cut down to the minimum, 
sincerely thinking that their own subsidy was simply a 
delayed payment of as sacred an obligation as the payment of 
interest on government bonds. And, naturally, no budget 
balancer was in favor of a balance obtained by repudiating 
sacred obligations. 

The philosophical learning which made budget balancing 
a cure for all ills was inseparably intertwined with a larger 
learning surrounding the word ‘‘inflation.’* For most people 
inflation meant a repetition of what they had read had hap- 
pened in Germany, which they believed was due to a wicked 
manipulation of the German mark intentionally engineered 
by people who were following the wrong principles. The 
problem actually concerned the production and distribution 
of goods. It was a problem in organization. Dr. Mordecai 
Ezekiel summed it up as follows:® 

We arc in no danger of the astronomical kind of inflation which 
carried the values of the American continentals, the French as- 

® Address made during a People’s Lobby luncheon and broadcast over 
the Columbia Broadcasting System, Saturday, April 24, 1937. 



T he Place of Learning in Distribution 103 

signals, the old German marks, or Russian roubles, to zero. 
Rather, the only type of inflation that might threaten us is such a 
rapid rise in speculative values, as in 1928-1929, or in commodity 
values, as in 1918-1919, as might eventually plunge us again into 
a major depression like those of 1920 or 1929. 

We may choose between several different alternatives to avert 
such a possibility. 

The first method, and probably the most desirable one, is one 
that businessmen themselves can adopt. It is for them to put into 
action the program recommended to them by the Brookings In- 
stitution in its book, “Income and economic progress.” That 
method is very simple: Use the reduced costs of production aris- 
ing from technological improvements and full-capacity operation 
primarily to lower the selling price of the product, and to raise 
wages of labor; and only in small measure to raise profits. In that 
way the buying power of workers can be kept rising, more work- 
ers will be employed, and production and consumption will rise 
together. Also, that will avoid the vicious circle of rising wages, 
rising prices, and more rises in wages, leading to still further 
rises in prices, which many industries seem to be starting today. 

In the essence, this program boils down to this: Increase pay 
rolls faster than you increase profits; and pay higher wages out 
of lowered costs, rather than passing them on as higher prices. 
Unfortunately, our leading corporations seem to be going in the 
opposite direction. From 1935 to 1936, industrial pay rolls in- 
creased only a litdc over 10 percent, while the profits of reporting 
corporations increased more than 50 percent. If businessmen con- 
tinue to increase profits out of all proportion to pay rolls, disaster 
is sure to follow. 

If one applied Dr. Ezekiel’s observation to American in- 
dustry, one would find immediately that the factors which 
affected different industries were completely different. In 
some there were signs of inflation; in others prices were actu- 
ally being lowered in 1937. It is obvious that different indus- 
tries required different treatment. 



104 The Foll^lore of Capitalism 

For example, in 1937 automobiles were produced in such 
quantities and at such prices that in spite of the increased cost 
of steel and labor even the unemployed could ride. Amuse- 
ments such as moving pictures had become available to the 
very poor. Railroads were lowering rates and improving 
services. On the other hand, the price of housing was increas- 
ing by leaps and bounds. The differences between these two 
opposite tendencies— only one of which could be described as 
inflation— were due to the different types of organization. 
For example, the moving-picture industry had in effect con- 
ducted a great public-works campaign, building theaters on 
the proceeds of a sort of lottery tax on the investing public in 
every small town in the country. The automobile industry 
had been subsidized by the greatest expenditure for concrete 
roads ever known in the history of any country. The railroad 
systems had become almost a part of the Government. Their 
principal problem was not rates but pensions. The building 
industries, on the other hand, were so organized that no 
single organization could produce a complete standardized 
house in any quantity. The pressures all were toward raising 
prices. Agriculture presented a different problem; textiles an- 
other separate set of difficulties. 

Had it not been for our elaborate economic and legal doc- 
trine it would have been easy for the nation to fumble its 
way into a solution of these different problems by using dif- 
ferent methods in each one. Some presented dangers of infla- 
tion; others did not. Some needed control; others did not. 
The learned theology of the time, however, convinced men 
that the same general principles of credit, noninterference 
with business, bureaucracy, the gold standard, the Constitu- 
tion, and individualism operated without regard to particu- 
lar organizations or personalities. The antitrust laws repre- 
sented a social and moral philosophy which considered size 
the principal criterion, m(ifified by something called “rca- 



T he Place of Learning in Distribution 105 

sonableness.” The laws o£ supply and demand were supposed 
to operate as soon as the antitrust laws were enforced. Free- 
dom of contract, a great moral principle, was thought to be a 
set of practical directions. The sum total of the debate led to 
the following conclusion : If separate practical problems are 
treated as separate practical problems, the nation will perish. 

The effect of this confused doctrine, which led either to no 
conclusion or to an absurd conclusion, was to reduce the 
thinking of intelligent people to a set of moral reactions. 

This is nowhere better illustrated than in the ballots taken 
by the National Economic League on what were the para- 
mount problems of the United States. This society repre- 
sented a fair cross section of sound, conservative, educated 
opinion. Its membership was, so far as it was possible, com- 
posed of prominent people who thought they were abreast 
of the times. In 1937 they voted on the comparative impor- 
tance of problems which confronted the United States as 
follows: Most pressing were (i) labor; (2) efficiency and 
economy in government; (3) taxation; (4) the Federal Con- 
stitution; (5) crime; and (6) public opinion and public senti- 
ment. The problems which were voted to be of minor im- 
portance were housing, tariff, agriculture, public utilities, so- 
cial security, land, population, banking and credit, the co- 
operative movement, and equitable distribution of national 
income. 

The reader will note from this a complete immersion in 
theology. “Labor” in the abstract was the most important 
problem. It was not considered, however, to have any con- 
nection with housing, or land, or equitable distribution of 
national income, or population, which were minor affairs far 
down the list. Efficiency and economy in government was the 
second paramount problem. Public health, on the other hand, 
was near the bottom of the list, as if it were entirely irrele- 
vant to efficiency and economy in government. The Federal 



I o6 T he Folklore of Capitalism 

Constitution was the fourth most important problem. Public 
utilities and natural resources, the control o£ which was in- 
separably connected with the Federal Constitution, were 
treated as minor affairs having nothing to do with it. And 
finally and most ludicrous: while the problem of crime was 
one of our greatest difficulties, prison reform was down with 
such minor things as mortgage relief for farm and home 
owners, population, and speculation — as if it were a separate 
subject having nothing to do with crime. 

The same way of thinking is illustrated in each yearly poll 
of this association. In 1934 efficiency and economy in govern- 
ment were at the top. Organized crime was third. Of wages, 
housing, and social security, which were then creating the 
labor problems which were to follow in 1937, the first two 
were at the bottom of the list, and the last was not on the list 
at all. In 1932 economy and efficiency in government were at 
the top. Restoration of confidence was near the top. Crime, 
under the heading of “administration of justice,” was a close 
runner-up. Unemployment insurance and stabilization of 
price level were near the bottom. 

Most amusing of all are 1930 and 1931. At a time when the 
nation was about to plunge into its worst depression and 
when solution of the prohibition problem was actually and 
in fact at hand, we find that administration of justice, pro- 
hibition, lawlessness and disrespect for law were the three 
most paramount problems selected by these learned men. 
Old-age pensions and insurance were not mentioned in 1930 
and were near the bottom of the list in I93i* 

These polls are so typical of representative thinking which 
was created by the impact of learned philosophical theory 
that we reproduce five of them on the pages which follow. 
The reader will note: (i) that abstractions always lead the 
list and practical problems get very few votes; (2) that there 
are no problems stated concretely; and (3) that the problem 



|r« ht rtUattJ for poUinUott M or ofm Monday, JIarefc 11, /9W] 


Paramount Probletns of the United States for 1930 

Miccttd by • prt fmatlal vot« of the Nelioiut Coaacil of Tbo Natkmal Ecoaoak LcaaM» 
takco in January 1930. 


^ VHH Xnl/rcfi ' Com^foKrt loiforknci tf tuijtcit 

2209 Administration of Justite , mmmmmmmmmmmmmmmmmmmmmmmmm 

2068 Prohibition ^ mmmmmmmmmmmmmmmmmmmmmmmmmmrn 

1699| . La«lmnes.si; Disrespect for Laar wmmomommtmtmmtmammmmmmmmmmmmmmm 

1642 Crime . 

1579 Law Enforcement. mimmmmmmmmimmmmmmmmtmmfmmmmamm 

123^ World Peace 

99$ Agriculture; Farm Relief mmmmmmmmmmmmmmmmmrn 


827 Tuation 


862 World Cx)un 

811 Reduction and Limitatioo of Armaments 

alO CoBsenallon of Natural Resources 

735 Effleieot Democratic Govemraent 

p72 Foreign Relations 

654 ' Education 

844, Individual Liberty * 

$13 Law Revision, Federal and State 

$11 League of Nations 

592 Unemployment 

570 Political Corruption . . 

567 Chdd Welfare, 

554 Hood Control 

521 Consolidations and Mergers 

512 • Tariff 

802 -Eugenics, Defectives 

500 Desecration of Natural Beauty in the U. S... 

465 Moral and Ethical Standards 

455 Election Laws — 

449 Economic Distribution 

440 Highways and Waterw ays 

4.15 Group Banking 

435 Penology, Prison Reform , 

432 Co-operatioa vs. Competition 

424 ■ Motor Traffic Regulation 

411 Freedom of Speech, of the Press 

400 Stabilization of Business 



.. . Other subjects voted on receinn^ less than 400 preferential votes 

’34.t |)rDi( TfilRf .W2 t'*< of Iciiure Time 215 RiJiulIsm 

J9I Suit KiiiM) .101 |.«t»n.An»cficin RrUtisa* R.iilrniJ» 

.WJ C.iiiicnnhiit 2S,1 Rcliition IM Lobbyinf 

3.S2 Ccrilrilit«iinn mI .Mottcy ind 27S Ijbur Problfmi I5S City l.il* Probldm* 

IWr 27.1 Financf.Binkind, CurffiHj. .159 FciIfnUicMJt »i»d Control 

.175 Iminiitiiitmn , Crcilil ol CorponlMns 

.1b2 .IviaiHtn 272 Thrill, Fa iruvmtMit HI RiJ'o 

ibO Old ,Vit* Penninn* mJ ?»i9 Public I'lilllici 1-17 Mrrchinl lltiint 

•• nufuitcr 261 .Niiifln*! l)tl«n»« 12b ri<HrrnmCBlilPriBcipl« «Bd 

Jib Pubtic lUatih 2,17 ,(!#lrnd»( Simplihcilioo 

Jt5 InnUllmenl Buying 2.15 Public Solely 121 Civil Service 

.1.1.1 .Mmiuiit «nil Diviiret 227 Industrieli'mind.lfncullurt IDS LinJ Policy , 

.1.1.1 Invrilmenl Truviv 226 Ntfro Problem t05 InleriUlc Commerci 

.110 SpecuUiion in Slochl and 222 Fcderd Rcoerve Syiltn' W llottiing 

Fnodituili ‘ 222 Ruuia 97 Public 

Jptt Fixfiitil Trade Policy 222 Couniry Lit* Problem* . 70 I'nited Stale* P»lent Uwi 


THE NATIONAL ECONOMIC tBAGUB 

* B«(m Somi, Bomm, Mm*. 


EXECUTIVE COUNCIL' 


iOMN MAYS HAMMOND 


WILLIAM ALLIN WHITE 

nTM TMt wwiu anant 

JAMU ROWUNO AHOeU 

H«aiiim<T TMJ m w— Tt 


A. LAWREHCI LOWELL 


ROGER W. RARSON ITATItmMI 

FRANK O. LOWDEN eeaut* tOMMM OF ILLMHR 
OAVIO ITARR JORDAN 

OUMcacM tUIMTV* ULANR fTWMMW, i*., IMV. 
lOWARO A. FILENE MdaotCMV 

GEORGE W. WICKERSHAM 

roauiM ArroANnavcAM. of tm* ifftio fr*TM 
NICHOLA* MURRAY BUTLER 

FFtSOeWT OF MLWttM IFFVtORTT 


The purpoK of Tbe Nitiooil Economic 
Leiguc 15 10 create, through its Nitiooat 
Council, an informed and disiatercstod. 
leadership for public opinion. The Nitionil 
, Council 11 made up of men who are oomi* 
nated as the best informed and most public 
spirited citizens of the country. They »re 
elected leparatcly from cich state by pre-c 
ferential billot. 

In selecting subject! by meins of the 
preferential ballot, (he member! vote by 
marking a cross before every lubject 
■which they consider importiot, indicating 
by added croues the subjects which, in 
their opinion, ire of greater and greatest 
imponance. The voles on related subject* 
should not be combined, at this method of 
voting gives eich subject Its full vote tod 
ill proper plKC On the, ballot. 

Of^Ci 





{To be telicUd for pubNcdlfon on or after Monday, March 2, 1931) 

Paramount Problems of the United States for 1931 

«f Mlactfd by k vod ol tbt Nktioikl Co«iicll ol Tld Nktl«nkll EckMak l 4 k|M, 

tkina Ik JkkMfy 19 S 1 . 


tf Vtkt Cta/Mrtfn* imp^rtnu ^ 

1871 Prohibition almmmmmimmmmmmmmmmammmmmm 

1750 Admiaistretioii of Jastice mmmmmmmmmmmmmmmmmmmmmmmmm 

1514 Lawlessness. DisreiqMct for Law 

UnempioyneDt. Ecoaonic StabOizatioa, 

Law Enforcement . mmmmmmmmmmmmmmmmmmmmmmmm 

Crime 


WorWCoan 

Tayatkw * 

WOrM Peace .... 

EfUdent Uenocratic Government 

A^etdture. Farm Relief 

hriiticalCorrupdon 

Tviir 

Reconsideration of War Debts 

Government in Business 

International Economic Relations 

Foreign Trade Policy 

Redaction and Limitatioo of Armaments. 

Sociaiimn.Commohuro 

League of .Vacioas 

Coaservation of .Natural Resources 

Law Revi^, Federal and State 

RevWoB of Anti'Trust Laws 

Edncatioii 

Ccntraiiadon of Money and Power 

ChidWellbfe 

CooferatioB vs. CompedtioB 

Moral and Ethical Standards 

State Rights 

bdividul Liberty 

Electioo Laws 

Old Age Pensiotsaad Insnrance. 



THE NATIONAL ECONOMIC LBAGUB 

* l«M«l 1««M, Mm». 


EXECUTIVE COUNCIL 

CMASUUk OAWIS 


MMCa ROWLAND ANOtU. 

M«ll« 

klOkOI W. WICKinSHAM 



MARkY A-OARRltUO 
aiUAt M tTkAWN 
J.W aCATRON 


The pgrpoK of Tbt Ntiioiiil Economic 
Lci|uc it 10 atite, tbroofh iii Nitioail 
CouonI, ID iatotned aod diHaiaated 
Itidcfibip for public opioioD, Tbt Niiioait 
Council ii mide up of men wbo An aotni*. 
niitd IS ibe belt informed ind pioM public 
spirited cititcDi of (be country. Tb^ ore 
elected sepiriiely from ticb tint by pn* 
Icrniiil billoi. 


Other subjects rated on receirisig leu than J50 preferential votes 


buaigntioa 

Baaaia 

Malar IWIcRofaJatlaa 
CaaaoMatioM and .Merftta at Ptaaactal, 
Maaafactarfiv ind MerrantUa Car* 
foratiana. 

CUaaaabia 

RahUoka betweea Labor and Cafitai 
Sarial lad Etaaokiic Readjoatmaat 
PabficUlilWM 
RaBraada 

SlabiBaliaa at the Yalao of Money 


284 ThHfL Citrarasaace 

244 riaaace, Baaklaf , Canoacy, Crodll . 

2M Graap Baaklaf 

218 NaUoaaiDataaae 

214 Paaolofy, Priaoa Reform 

218 FroadomorSpee(b.ortbcProao 

200 Saeralatioo In Slocka and Poadatvia 

IM PabIkHoahh 

117 Marrlife and Dfrartt 

170 Ei«eoka 

130 Indoatrialiaffl and Afrirallara 
1 17 Govtrnmenfal PriitcIplH and PoUdM 


In Kltaiof lubjecti by meana ol tbc 
prefereatiit ballot, ibe memben vote by 
marking a cron before enry lubfci 
kbicb (bey coniidcr important, indicaiiag 
by added aoiKi tbt lubjecti wbkb, ia 
tbeir opinion, ire of greater and grtatM 
imponiace. The voiei on related lubjccta 
should not be combined, is tbii method of 
voting gtvei each subject ill full vote and 
its proper place on the ballot. 

Omumm PJ IswWMm*, Iflf 



193 2 

Paramount Problems 


The Present Economic Depression 

M hy « fntetiuiu w>U oi til* NtUoBia CottMlI ol TIm NatiMUd Ecooomk 

1S17 bUloto w«n rthurtMd to April IStk 

ViMiitr 

tf VpUs Subitcii Cmparqttvt Inporlcnot of subjtclt 

1231 ttmda imd Effickaq ia G«renaia(, 

Niuioul SUte, Qlj 

1582 TuatiOD 

1528 Reptntiooa and bit«nuUi<NuJ Debli 

1480 Banki, Baakinc, Credit, Ftottco 

1105 Reductioa and LinUatioa «l hmurntt, Dia* 

annaneat • mmmmmmmmmmmmmmmmm 


1075 Tariffs 

1071 Reatoralion of Coaflde&ca 

1026 AdniniatraliMi of Inatke 

922 lalenulioBai Tariff CoafcrcBce 

108 l<DeiD|lofne«i.iuMai9lo7BieBtre)kf 

761 Ecoaomic Plaaaiag 

768 Railroads, TraiupsrtatiQa di 


706 Orer-aiMculatleB 

687 laleriatioiial Cooperatioa ta praooto 
sad aeeurily 

065 CoordiaatloB of Prodadloo aad PurchaiiB{ 

Power 

643 A{ricttIture,FkrraR«lier 

592 Meaej, the gold aUBdard,oBTer... .. 

581 Federal Keserre Policf 

876 Fordga Trade 

573 Equitable DistribajUoo of Wealth or lacoaie. . . 



531 Orer'eitcBsion of Credit ..... 

511 Interaatioaai Eceaeodc Coafereace 

491 CeeaeraUoo (vs. CoopetilioB) aa a Social aad 

ladoatrial Priadpla 

485 fUdeat DUtributioo 




477 GcrBiaB 7 'a Siuiatioa. 
453 AnU-TmatLawa .... 


445 lateraatioaal Moaetar; Coaferoaco . . 
401 UaeinpkijrBMiitiaaaraaco........... 

398 Wages 

383 InatalliBeBt SeUtag . 



367 Uad. adadaistratioB, tttiUatioB, t|uu 

364 EdacatioD 

328 SlabilixaUoB of Price Level ; 

298 Public VtUilles, regulatioB, goveroMal owaer* 
diip 



283 Over^cenlraliiatiooof Baaiacaa.. 

186 Sedalaai, CoBUBoaliai 

174 CapHallaat 

153' Rusaia..., 

141 lloearaed bcrenent 


TH8 NATIONAL ECONOMIC UAGUB 


IXaCUTIVE council 

CHABUS 0. DAWfS 

mmmA vtoAMotocNr «r iw iMm mns 
JOHN HAYS HAMMOND MMMMAttS 
JAMtS BOVYUNO ANOEU 



TIm purpoM of The Nitionel Ecuaemk 
Utfue li to ereeie, ihnMsh iu Ntliesa) 
Couik 9, n informed ind dUateisited 
Icedetikip (or public opinion. The Nitioa4 
Council ii up of men who an aonh 
neted u the bc»i informed end moil pobik 
ipirUed ciliient of th« countiy, Th^ are 
^led lepentely from uach Mala by pra> 
(ueatUlUllot. 

In' ielcctini wbiocU ^ meani of the 
preforwuUl hnliot, the .memben vote b) 
mvkini I eiMi before e\’ci 7 lubiect vbicb 
6ity coniider Importnot, iodkntinf by added 
ctoeiei the nibioett wbkh. in ibtir opinion 
nr* of sTHterud areitcit impoitniic*. An 
ibii method of votii^ |im eoch labiect iti 
fal ^Yitf tad its proper place on the ballet, 
Ibu votes on the leleted lobjecU ibeuid aei 
be combined. 



Paramount Problems of the United States 

Ai Mkctcd by pvdcitatlii v«te o( tbt Natloniri CoudcU of Tho Natlootl Economic Icaiuc i' 
tnkra la May, 1934 

Htmitr 

tfV$^ C*mf4r«HM imf«rla»t4 *f 

1172 EflkieBcr and Economy is GoTeroment mmmmmmmmmmmmmmmmmmmmmmmmmmmmmrnm 

■ Federal (480) Sute(415) County (379) City (445) Town and Village (286) 

1014 The Adminiatrttioa’a Recorery Metsnrea 

jAs a unified program, 

962 Offuized Crime mmmmmmmmmmmmmmmmmmmmmmmtmmmmm 

Bnakdown of Lav Enforcement 

941 ' Tcution mmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmrn 

Unification, Equaliation, Reduction, Duplication, Salta Tax 

724 MooeUryPolicy.,.......: ■ nimi 

Devaluatioo, Stabilixation, (jold, Silver 


611 PnUic Opinion end Pablic Seatiment 

The ne^ of aderjuate non-partiaan activity under democratically chosen Icadenhip to inform 
and unite public opinion and public tentiment, ai the only power that can reach and enforce 
agreement for the establiahment of a louod and stable economic and political order. . 

606 World Peace 

Prevention of War, Elimioatioa of Private Production and Sale of munitioQs and 
amu manufacture, etc. An effective peace pact. 


585 Tariir 

577 Veterana’ Benefit! , 

570 Labor 

568 Administration of justice 

551 Agriodtare 

479 Industry i 

473 Unemployment 

464 Banking and Credit ..( 

441 International Cooperation ^ 

440 Federal Budget and Fiaaacea 

407 Inflated Debts 

385 Edneation i 

374 Public UtiUtiei 

371 Federal Securities Act i 

360 TheCwuumcr i 

347 apital , 

336 Coastitutioaal Aspect of the Recorery Program t 

322 Trittsportatioa i 

279 Stodt and Commodity Exchange R^nlatioo . . , .i 

272 National Defense < 

267 Mortgage Relief for Fann and Hone Owners, . .i 

263 War Debts , 

244 Equitable Distribution of National Income 

238 World Court 

235 land 

228 Natural Resoufces 

177 Population DUtributkm , 

169 league of Nations 

164 Pan American Relations 

163 GoremmenlDeTcliqjment Projects ....i 

138 Housing 

125 PubUcHealth 

85 iMliDmeatBnyipg,,,,,,, 


THE NATIONAL ECONOMIC IBAGUB 


EXECUTIVE COUNCIL 


CMAOttl fVANCIS ADAMS 



SILAS M. STRAWN WWVU 

VRARK A VANDCRLIP 

fMMCa PMKOIRT HkTigNI^ CTTV MMI. H. V. 


iAMCS P. VUARBURO MMUR 

aCOSOC W, WICKJR8MAM 

rwmU ATTMMY4MDIM. <V n« UMTS r*Tt» 


Tb* purpox of Tho NtliOMi Ccoftomic 
Lcigu* ii to craito, through its Nitioiul 
Council, sn informd ind diiinlertsud 
leidcrihip for public opibion. The NuIomI 
Council it made up of men who ire nomi> 
noted It the best informed attd mott public 
spirited citiieni of the country. They irs 
elected separately from each lUte by pref- 
erential ballot. 

In aeleding lubjecti by means of ih* 
preferential ballot, the members vote by 
mwking ■ cron before every subject which 
they consider important, indicating by added 
crosiei the aubjecta which, in their opiniott, 
are of greater and greateit importance. As 
this method of voting gives etch subject its 
full vote snd its proper plies on the ballot^ 
' the votes on the rejaud subjects should not 
bccoBhissi 



Paramount Problems of the United States for 1937 

^•eltctcd Iky prcfcnatlal vote ot the Natloul CouocU of Tbc Natiooal Ecooonic Uagoe. 

(Tho vote wM taken ia Ftbniary, 1937.) 


Nnitf 

0jVHn StijicU CimftrtlhUmlitrtanci »/ iuijtcti . 

DS5 Libor........ Wimmmmmmmmmmmmmmmmmmmmmmm 

lixluttrial rclilions; control of latx)r uitioni; tinployniciit, wases, bouts, orsanitaiion 

014 Efricienrj ind Economy in Government wmmmmmmmmmmmmmmmmmmmmmmmmm 

Federal (Jit!) Slate (253) City (249) County (221) Town and Village (171) 

7^0 Tiution.... 

Unification, equalization, reduction, aupliution: sales tax, etc. 

6^ The Federal Constitution .mmmmmmmmmmmmmmmmmmmmm 

Statei' Rights ; Supreme Court 

614 Crime.....; 

Breakdown of law enforcement ; juvenile crime 

517 l*uhlk Opinion and Public Sentiment mmmmrnmmmmmmmmmmmmm 

The need of adequate non-partisan activity under democratically chosen leadership to inform 
and unite public opinion and public sentiment, u the only power that ran ruch and enforce 
agreement for the establishment of a sound and stable economic and political order. 


489 Federtl Budget ind Floincefl. 

450 Monetary Politj 

449 Democracy 

394 Industry 

371 Prerention of War 

361 Merit System in the Civil Service 

330 apllal 

311 International Co-operation 

300 .Unemployment 

282 Administration of Justice 

263 Public UUlltics 

259 Natural Resources 

245 Agriculture... 

220 Social Security.. 

212 Thriff.... 

194 Education..... 

159 Transportation....... 

147 Public Health..... 

136 Liquor Control 

135 National Defense. . . 

132 Child Ubw....... 

132 . Housing.... 

12Mana 

99 Equitable Distribution of Nalioiu^ Income . . . . 

96 The CotqtcfaUve Movement, 

94 Bulking and Credit 

73 Prison Reform 

62 Mortgage ReUef for Farm and Home Owners, 

62 Population 

46 OlMttlatioB, 



THB NATIONAL ECONOMIC LBAOUB 


EXECUTIVE COUNCIL 


CHARLES FRANCIS ADAMS , 

rOHMIA tedWTMT » IS# 

SEWtLL AVERV 

Vtci MCSieCHT CMKASO Otllf oommiMH 
EDWARD A. FILENB MaaOWWt 

IRVINO FISHER 


FRANK O. LOWDEN r< 


KcanAAY /ww latauFW- 
J. W. BEATSON • KAOON STMT. I 


The purpose of The National Econoinlc 
League is to create, through iU National 
Council, an informed and difinterestad 
leadership for public opinion. The National 
Council is made up of men who are nomi* 
nated as the best informed and most puhBe 
spirited ciliiens of the cpuntiy. They ar* 
elected separately from each aUle by pwf* 
erential boUoL 

In selecting suhjecta by meani of tho 
preferential balloL the menberi vote by 
marking a cross before ereiy aobjoct whlA 
they coniider important, indiating by added 
aoascs the subjects which, in their opInioA. 
are of greater and greatest importance. As 
this method of voting gives each lubjaet Us 
full vote and its proper place on the baDoL 
the votes on the related lubjsctl Mi 
be combined, 




T he Place of Learning in Distribution 107 

selected as the most pressing is one which is already on its 
way to a solution through the emergence of a new organiza- 
tion which is rising to fill the need. Thus, when the organiza- 
tions to break the prohibition impasse had become strong and 
effective, prohibition was thought to be our greatest danger. 
When government was filling the gaps in finance, relief, un- 
employment, and so on, governmental efficiency and econ- 
omy were our most pressing difficulty. In 1930 and 1931, 
when government was refusing to meet the problems under 
its nose, there were thought to be no pressing problems of 
government administration. When labor organizations were 
beginning to represent labor effectively in 1937, and had con- 
ducted a series of strikes with less bloodshed and disorder 
than had occurred in any similar period of adjustment be- 
tween labor and capital, labor was our greatest problem. 

The learning and distinction of this group are illustrated 
by the names on its executive council, which appear in the 
exhibits. 

T he Effect of the Philosophical Learning of Government 
in Encouraging So-Called Private Organization 

Political and legal thinkers of our time do not consider 
private business organization as “government.” Great cor- 
porate organizations are looked at as rugged individuals. We 
shall analyze this interesting fiction later. It is sufficient here 
to point out that it is a pure fiction. For most people what the 
so-called “government” docs is of minor importance. “Pri- 
vate” organizations dominate their credit at the bank, the 
prices which they pay for necessities like light, heat, water, 
and transportation, their promotion, and, finally, their secur- 
ity for the future. Nevertheless, political and legal learning 
docs not think about business organization as “government” 
in any sense. Paternalism, bureaucracy, regimentation, arbi- 



io8 The Folklore of Capitalism 

trary control, and so on, are not words which are ordinarily 

applied to our regimented industrial structure. 

This curious attitude is the result of a philosophy that great 
organizations dressed in clothes of individuals achieve long- 
run unselfish and humanitarian results by pursuing their 
selfish interests. The only control needed is that of an um- 
pire. The only formulas needed are standards by which the 
umpire can apply the rules of the game. 

This philosophy gave enough freedom for opportunistic 
action to our temporal industrial government to make it one 
of the marvels of the world in productive efficiency prior to 
the depression. It was a creed designed to make any inter- 
ference by political organization in industrial affairs a pure 
ceremony. Thus business achieved freedom to organize and 
to experiment. All of the formulas which hampered political 
government justified letting business government alone. 

The entire priesthood of law and economics directed their 
detailed directions and inhibitions at political organization. 
The standards which they held up to private business were 
purely inspirational. “To be grandly vague,” said Herbert 
Finer, “is the shortest route to power; for a meaningless noise 
is that which divides us the least.” 

Thus the ritual of business government was not encum- 
bered with definition and learning. The late J. P. Morgan 
did not surround himself with professors when he organized 
the United States Steel. The theories of John D. Rockefeller 
did not interfere with his conduct as a businessman. Business 
during its great development was not concerned with waste 
or with thrift, or even with fair dealing. It had a philosophy 
which eliminated those standards as practical impediments. 

The lack of learning and definition in business affairs is 
illustrated by the lack of order and logical symmetry in our 
schools of business organization. Most scholars found the 
study of such day-to-day activities uncongenial. They were 



T he Place of Learning in Distribution 109 

responsive to no orderly logical classification. Therefore, 
schools of business administration had a very precarious 
status as scholarly enterprises. The study of advertising or 
arrangement of shop windows had far less academic prestige 
than the study of theoretical economics. The one was an un- 
learned and practical pursuit suited only to a trade school; 
the latter was real scholarship. The reason was that the super- 
stitions and faiths which made business organizations co- 
hesive were more like the early disciplines of the Roman State 
than like the elaborate learning which is essential to philo- 
sophical literature. 

The basis of the business organization was discipline. It 
was expressed, not in terms of military glory, but in terms of 
hard work, instant obedience and loyal cooperation with 
superior officers. It was not a drafted army but a volunteer 
army. Just as military service was the only honorable career 
of an early Roman, so business service was the only honor- 
able career of a wide-awake American, disdainful of the 
softer pursuits. The penalty for lack of obedience and loyalty 
was discharge from the business army. 

Little did these businessmen worry about theoretical eco- 
nomics in the day-to-day conduct of their enterprises. Their 
religion of the beauties of competition was a symbol repre- 
senting the early history of the tribe, performing the same 
function as the tradition of military glory in Rome. These 
men developed a real understanding of the public psy- 
chology necessary to conduct their own small principalities. 
They hired public relations counsel who used words and 
slogans for effect, rather than as part of the search for the 
holy grail. The techniques of advertising grew with amazing 
rapidity. They did not lollow the legal or ethical religion 
but used it in moving people by rhetoric and by pictures. In 
this enterprise they called on the methods of a rapidly de- 
veloping psychology — a psychology which did not deal in 



1 10 The Folklore of Capitalism 

moral terms — ^which took man as it found him, not worrying 
about his tendencies or trying to abolish his sins, but trying 
to profit by them and to utilize them. Their underlying 
creed was “grandly vague” and inspirational enough not to 
interfere with their techniques. 

Spiritual V. Temporal Government, and the 
Political Machine 

Thus we developed two coordinate governing classes: the 
one, called “business,” building cities, manufacturing and 
distributing goods, and holding complete and autocratic 
control over the livelihood of millions; the other, called “gov- 
ernment,” concerned with the preaching and exemplification 
of spiritual ideals, so caught in a mass of theory that when it 
wished to move in a practical world it had to do so by means 
of a sub rosa political machine. There was no question as to 
where the temporal power lay. Occasionally, the spiritual 
government could make a business baron come on his knees 
to Washington, but these were the rare occurrences. It was 
the general opinion in America before the depression that the 
government at Washington should render unto Caesar the 
things which were Caesar’s, and confine its own activities to 
preaching. The attitude of the conservatives toward govern- 
ment in business was the same as toward a minister of the 
church who deserted his pulpit to buy a seat on the stock 
exchange. 

There was something peculiarly medieval in the faiths 
which sustained the business government in America. In the 
first, place, men, with that astonishing ability to shut out 
reality characteristic of group thinking, actually believed 
that it was not government at all. The American Telephone 
and Telegraph Company and the United States Steel Cor- 
poration were “individuals” who “owned” their industries. 



T he Place of Learning in Distribution 1 1 1 

Such intangible things as morale, a trained personnel, insti- 
tutional habits, public acceptance and good will, indeed all 
the elements which distinguished a going concern, were 
thought of as private property, owned by an intangible indi- 
vidual, just as it was once thought that the King of France 
“owned’' the State. The independent principalities of busi- 
ness were subject to the spiritual values dramatized by the 
National Government. But the rulers of those principalities 
thought of the National Government as something designed 
to preserve their “freedom.” The fiction was carried so far 
that men thought of the employees as also “free” to work 
when and where they pleased. This curious faith could be 
expressed by the Supreme Court, in violation of all the ob- 
served facts, and achieve acceptance, even when contradicted 
in dissenting opinions by members of the Court itself. 

In the light of the taboos and superstitions which sur- 
rounded the spiritual government, this separation into spir- 
itual and temporal rulers — an unconscious hypocrisy — was 
the only practicable way of getting along. There had to be 
an area where men were free to move and to experiment, 
where men were free from learning and from theory, and 
where organizations could develop. No people has yet existed 
who could get along without putting its ideals and practices 
into different compartments. Indeed, no well-trained psychia- 
trist thinks that the individual patient can survive without 
some machinery for an escape from the world, or advocates 
it. Yet the thinkers about government had no objective grasp 
of the place which the corporate myth was playing in society. 
Even the social doctors believed in the fantasies of the great 
organization for which they prescribed, or else adopted the 
point of view of missionaries to the heathen and prescribed 
an alien set of fantasies without regard to the fact that they 
were planting them in uncongenial intellectual soil. And 
thus, since all cures based on this unreal conception of the 



1 12 The Folklore of Capitalism 

social structure seemed worse than the disease, the notion of 
laissez faire was sure to be adopted sooner or later by all those 
who actually remained in power. However, the laissez faire 
of the theoretical economists was far different from the 
laissez faire of the business government. To the prince of 
business, laissez faire meant only that his principality should 
not be interfered with by an attempt to put the dreams which 
supported the spiritual government into actual practice. 
Therefore, the laissez faire economists constantly advocated 
free trade, while the laissez faire businessmen insisted on 
letting protective tariffs alone. 

Nevertheless, in spite of this constant disagreement be- 
tween the theories of the institutions and their practices, the 
temporal government worked out very well indeed, and de- 
veloped efficient organizations. 

Of course, industrial government never lived up to its 
creed. That fact created the atmosphere which produced our 
scK:alled liberals who studied the creed and preached about 
the sins of business in violating it. Such “attacks’’ on business 
organization did not hamper it because they did not propose 
organizational changes. Instead they strengthened the creed 
by showing that in it lay the way of salvation. When or- 
ganizational changes began to appear after the depression, 
the liberals opposed change and lost their identity as a group. 
This is characteristic of liberal movements in times of 
change. They always disappear, because they are symptoms 
of belief in established forms. They stand on the same funda- 
mental truths as conservatives and immediately join forces 
with conservatives when new organizations appear to violate 
those truths. 

So long as liberals preached against business sin, they of- 
fered a safety valve through which the explosive energy of 
discontent could escape. 

Actually, as any observer may note, the disagreement be- 



The Place of Learning in Distribution 1 13 

tween the preacher and his congregation is one of the things 
which keeps the church alive, so long as the minister is will- 
ing to confine himself to preaching and exhortation. Men 
like to hear about their sins. They love to have theological 
doctrine expounded which they do not have the faintest in- 
tention of following. And since the economists and lawyers 
of the day believed that it was more important to leave the 
temporal government alone than to have even sound theories 
forced upon it, they operated like preachers in all churches 
since time immemorial. The barons of the Middle Ages 
didn’t follow the Bible, but they felt that it was a great book 
just the same. 

The V unction of Learning To Reconcile Politics 
and Ideals 

Naturally, there had to arise some machinery which would 
keep the spiritual and temporal government marching in 
step. Such machinery had to be placed behind the scenes, be- 
cause the elaborate ritual which went on in front had nothing 
to do with the realities of the situation. This may be illus- 
trated by looking back at the prohibition experiment. When 
men wanted to pretend that the nation was dry, a vast and 
complex organization of bootleggers became a necessity in 
order to meet the demand for liquor. There was a practical 
task before the social organization which had to be accom- 
plished, i.e., the distribution of liquor. There was also an 
elaborate ceremony to be celebrated, i.e., that the nation was 
dry. It was the duty of the spiritual government to denounce 
the liquor-distributing organization as sinners and to put a 
few of them in jail, without however going to such extremes 
as to stop the actual business of supplying alcohol. 

For this duty, the myths of the time were completely ade- 
quate. The conceptions of freedom, individualism, and so 
on, became sacred things which justified the purely cere- 



1 14 The Folklore of Capitalism 

monial enforcement of prohibition which the demands of the 
time required. When it again became recognized that the 
distribution of liquor was legitimate, the machinery for that 
purpose became much less complicated. Ritual, learning, lit- 
erature, disappeared. Bartenders, a comparatively decent and 
law-abiding class, were substituted for bootleggers. The 
business was done better and more efficiently. 

Today there is a desperate spiritual need to impose impos- 
sible standards on governmental organizations, and to pre- 
tend that it is principles which govern, and not men. Hence 
the political machine arises as the only kind of organization 
which can obtain the necessary freedom from those prin- 
ciples to do the practical tasks of government. It is the task 
of governmental theory to prove that we are governed by 
political machines only because right-thinking men have not 
abolished them. This will happen through an awakened pub- 
lic conscience caused by preaching. 

Everyone knows that political machines cannot be abolished 
so long as the conflict between ideals and practical needs in 
government exists. Yet the attempt to abolish them is part of 
the ritual which makes them survive by showing we are true 
to our ideals in spite of our frailties. Situations like this arc 
quite understandable when discovered in maladjusted per- 
sonalities whose fixed ideas interfere with their practical 
necessities. However, they seem more difficult to grasp when 
they occur in government. Yet these results are obvious and 
inevitable. The United States Steel Corporation would de- 
velop a sub rosa political machine the moment a set of ideals 
was imposed on it which interfered with the distribution of 
steel. In minor conflicts of ideals, our great corporations do 
develop such machinery (as in the case of strike breaking), 
and both stockholders and executives regard them with the 
same mingled horror and regretful acceptance with which 
statesmen regard Tammany Hall 



T he Place of Learning in Distribution 1 15 

It is, therefore, natural that the country whose theories of 
government are the most unrealistic in the world should de- 
velop the greatest and most powerful sub rosa political ma- 
chinery. It is not civil service that makes England less subject 
to sub rosa influences, but the fact that the English do not 
have the same inhibitions about the open exercise of power by 
their government. For example, the United States Govern- 
ment maintains an army the equal in discipline and efiiciency 
of any in the world. The reason is that once the American 
people arc willing to admit the necessity for a governmental 
enterprise, their genius for organization is as great as any in 
the world. 

The Inflation of Legal and Economic Learning 

When men arc confronted with a contradiction between 
their myths and reality, they have only two recourses. The 
first is ceremony, drums, and oratory. The second is reason 
and dialectic. The conflict must be made to disappear under 
a thick blanket of incense of some sort or other. And it is 
only natural that a people with a mystical reverence for rea- 
son should demand books. 

When men make plans for the conduct of an actual insti- 
tution whose workings they understand, and whose objec- 
tives they believe legitimate, they feel the need for no great 
philosophical outpouring. But when men plan crusades based 
on an institution they do not understand, a vast dialectic 
literature pours forth to aid a faith which is in conflict with 
the facts that they observe. Thus, the depression witnessed 
the greatest flood of legal and economic literature the world 
has ever known. 

The difficulty in the depression was that men were making 
plans for a paper government which had no real existence. 
In such a situation the search for explanations and theories 



1 1 6 The Pol \lore of Capitalism 

became the more intense the more men felt that something 
was wrong. In law, books streamed off the presses at a con- 
stantly accelerating rate. Twenty-five thousand printed de- 
cisions a year, over a hundred law reviews, added to the con- 
fusion. Commercial digests and treatises coordinating all 
these books kept appearing. It became impossible in a law 
school for students to write even about simple things without 
an amount of labor that was appalling. 

The situation was similar to that of the Church when minis- 
ters were multiplying treatises and sermons went to “sixthly” 
and “seventhly.” This created a great counter-literature writ- 
ten by people called realists, which in turn called forth a new 
set of defenders of the faith. Legal doctrine grew so huge it 
became difficult to argue a case without presenting a longer 
brief than the case could bear. 

Economic literature suffered the same inflation. The books 
were of two general classes. The first pointed out that from 
the point of view of a census of resources and labor there was 
no earthly reason for so many slums, such inadequate medi- 
cal care, so much waste of mineral or agricultural resources, 
so few clothes, and so little food. They demanded that the 
nation get together and utilize its plant efficiently. The sec- 
ond class pointed out the danger of efficient national organi- 
zation by reciting the parable of the wild Russian and the 
cruel German. All these volumes developed theories and 
counter-theories. None of them developed organizations. 
The net result was that economic theory became so com- 
plicated that it was almost useless for the only practical pur- 
pose to which it could be put; that is, for authoritarian 
argument. 

The burdens on the politicians coping with this inflation 
of legal and economic learning led to an influx of professors 
into Washington. Proposals had to be dressed up so that they 
fitted into a rounded economic and legal system. The first 



The Place of Learning in Distribution 1 17 

impulse of practical politicians was to hire learned men to 
help them. Thus we find Roosevelt in the early days of the 
depression employing a brain trust. Like all groups of learned 
men since the council of Nicaea, this brain trust split in all 
directions on doctrinal points. There was a succession of res- 
ignations by bright and very articulate men whose pride of 
opinion had been violated by political action. The brain trust 
fell into disrepute and became a political liability rather than 
an asset. 

Yet the emotional need for authoritarian learning was still 
there. The Republican party felt a gnawing vacancy which 
could be filled only by establishing a counter-brain trust. And 
thus we had two sets of professors disputing over which were 
the sound fellows and which the quacks, following the gen- 
eral lines of theological dispute since the invention of the art 
of writing. How much of this stuff to put into a political 
platform was a burning question. It could not go in at all 
unless reduced to meaningless generalities, but it was im- 
portant that some of it appear. Wise candidates dodged the 
issue as long as they could, but no one could dodge it com- 
pletely. The text that finally appeared was reduced to its 
ultimate in terms of harmlessness so that it was actually im- 
possible to tell the difference between the platforms of the 
various opposing groups in terms of the practical action to 
which they might lead. 

In 1936 the inflation of legal and economic thought in 
America had achieved a volume never before experienced. 
The thinking men of the country were all busy thinking and 
the more they thought, the more mixed up they became. No 
one could fit the social organization which he saw before 
him into the organization of his dreams. And then on top of 
all this inevitable development, theorists wrote books com- 
plaining that political platforms were meaningless because 
of the stupidity and insincerity of politicians. 



CHAPTER V 


T’he Use of the Language of Private Property 
To Describe an Industrial Army 

In which the inconvenience and discomfort of using an ancient 
language in public discourse are pointed out. 

T he confusion in political thinking which we have 
just described arose out of the gradual decay of an 
old legal and economic religion. The difSculty with 
the religion was that it had become an obstacle to the or- 
ganizing ability of the American people. It was producing 
phobias instead of inspiration. Economic principles had be- 
come an arsenal of weapons used against new organizations 
instead of for them. Governmental morality had become an 
excuse for government not to meet obvious social demands. 
In a period when rational philosophies of government were 
necessary for our comfort, everyone was demanding a new 
creed; yet every new creed advanced violated the old ideals 
which were still s^red. This is usual in times of social 
change. It is one of the inevitable symptoms of progress from 
one form of socialjarganization to another. The literature 
of the time is typied of any similar which is experiencing 
a conflict between its ideals and its needs. 

The most obvious conflict of 1937 was that in which the 
creeds accepted by respectable people described social organi- 
zations in the language of personally owned private prop- 
ertv, when as a matter of fact the things which were described 
were neither private, nor property, nor personally owned. 
The corhplete failure of lEeTahguage of law and economics 
as a means of communication of sensible ideas created the 



Use of the Language of Private Property 1 19 

endless debate abou t pri nciple and the exhortatwns to heed 
the lessons of history which we have been observing in courts, 
in colleges, andln the editorial pages of newspapers. Before 
analyzing the failure of our economic and legal language as 
a means of communication of practical ideas it is first neces- 
sary, at the risk of repetition, to discover why old gods always 
thrash around so violently before they die, and why most re- 
spectable people become so uncomfortable in the process. 

The Discomfort of a Changing Mythology 

The reason for this confusion which attends the growth of 
new organizations in society lies deep in the psychology 
which concerns the effects of words and c^emonies on the 
habits of men in groups. Men always idealize these habits 
and the structure they give^^^ The idealizing is done 

by magic words which at first are reasonably descriptive of 
the institutions they represent. At least they represent the 
dreams which men have of those institutions. When the in- 
stitutions themselves disappear, the words still remain and 
make men think that the institutions are still with them. 
They talk of the new organizations which have come to take 
the place of the old in the terms of these old words. The old 
words no longer Jit. Directions given in that language no 
longer have the practical results which are expected. Realists 
arise to point this out and men who love and reverence these 
old words (that is, the entire God-fearing, respectable ele- 
ment of the community) are shocked. Since the word^are 
heavily ^charged with a moral content, those who do not re- 
spect lb^etn„ ate im The respectable moral element of 

society will have nothing to do with such immorality. They 
feel compelled to turn the power over to nonrespectable 
people in order to reserve the right to make faces at them. 
Yet they recognize that those immoral people are doing 



120 


The Fol\lore of Capitalism 

something which has to be done. This fact can only be ex- 
plained under the curious age-old concept of sin. No religion 
ever got along without this conc^t. TtTs usefiirhecause every- 
one can continue to work to abolish it, knowing full, well 
their objective will never be reached. Thus, in these times of 
confusion, everyone believes that human character is d^isin- 
tegradng. This happens whenever the rising gen eration 
thinks differently from the old. 

By this process theTofmuIas become more important th^n 
farts. They cease to be tools and become ob) ectives in them- 
selves. Legal and economic literature (or whatever other 
ceremony is current in such times) becomes more important 
than life. And in the confusion which results from this con- 
flict respectable men become angry, sad, romantic, cynical, 
disillusioned, last-ditch defenders of a faith. They do not be- 
come cheerful, practical technicians dealing with the facts 
before them. 

In such times men get to talking about the decline and fall 
of civilization and worrying aboujt Greece and Rome. A vast 
literature of explanation and exhortation poursTorth. This is 
a symptom that the class which produces that literature is 
becoming uneasy and impotent and needs a great deal of 
printed matter in order toprove to itself that it still represents 
the only sound type of organization. The blame for that un- 
easiness is all ascribed to the immorality of a society which 
has perversely and sinfully become unlike the little ideal pic- 
tures which represent what a proper society should be like. 
At such times men predict Fascism, Communism, and all 
sorts of similar catastrophes. They prove this by putting it 
on the printed page, because they have more faith in the 
printed page than in the spok^jword. 

The result of this uneasiness may be a war, or may be only 
a lot of oratory, poetry, and romantic economics. What hap- 
pens depends on whether the kindly, tolerant, respectable 



Use of the Language of Private Property 121 

elements of society are able to emerge from this mood of im- 
potence before less kindly and tolerant people seize Ae r eins 
of po\ver. The mood does litde harm if it is only a temporary 
escape from reality, like being in loy^ or mourningjor the 
dead. Indeed, iFwould be a drab human race which did not 
shed„_a jear over departe^institutions. Romantic lovers and 
inconsolable widows are both very lovely dramatizations of 
important ideals and the writer would not abolish them if 
he could. Nevertheless, it is an incontestable fact that they arc 
hard people to put up with outside of books and when there 
is a job to be done. 


The Mythology of Private Property in an Age 

of Organization 

Why has the literature^of Jaw and economics become today 
more like a funerd js^ryicc than the pep talk for salesmen 
which it should be to promote organization? The reason is 
that it is using the little pictures of private property and profit 
motive to describe a society which is much more like an army 
than. the~giQyp of horse traders which it is supposed to be. 
Against the background of such a society the terms, do jaot 
make sense. Men believe that a society is disintegrating when 
It can no longer be pictured in familiar terms. Unhappy is a 
people that has run out of words to describe what is going on. 

It is obvious today that private property has disappeared. 
The writer, for example, owns some furniture which he can 
use without the assistance of any large organization, though 
not to the extent his parents could, because he is tingle to 
repair it as his father was. For transportation he has an auto- 
mobile, but he does not know what is going on under the 
hood and could not run it without a great organization to 
assist him. His father owned a western ranch and raised his 
own horses. These horses burned hay, but the hay did not 



122 The Folklore of Capitalism 

come from a filling station, which in turn required a still 
larger organization to supply it. Yet today furniture and 
automobiles are the nearest we come tqjpriyate prpp^rty gen- 
cradly owned by any large group of our jpopulation. 

The other things the writer “owns” are all claims to rank 
0££iiYikge in an organizational hierarchy. He is a professor 
at the Yale Law School and hopes that Yale will feed and 
lodge him. He has a piece of paper from an insurance com- 
pany which he hopes will induce that organization to take 
care of his wife if he dies. He has other pieces of paper from 
other organizations operating buildings and railroads and 
manufacturing plants which give him precarious privileges 
in those industrial governments. Wealth today consists in 
nothing^ any one individual can use. The standards qfjyealth 
are simply current expectations of how the individual stands 
with the rulers of industrial baronies coupled with a guess 
as to the strength of those principalities. 

I have a friend who “wen^broke” during the depression. 
Everyone said he was “poor.” In material^things he had a 
large house and servants and a number of automobiles. How- 
ever, these did not count because a number of financial or- 
ganizations were thought to be on the verge of taking them 
away from him by virtue of pieces of paper which enabled 
them to storm his castle walls. Therefore, though my friend’s 
standards of living were beyond my own hopes in this world, 
nevertheless I was the more “prosperous” because men had 
more faith in Yale than in the organizations to which he was 
attached. 

Today my friend is no longer broke. The organizations in 
which a fiscal heraldry gives him rank above the common 
herd are now thought to be strong enough to repel attacks. 
He “lost” his money and “gained” it back again. In doing so 
he had to enter into new allegiances with other feudal barons, 
but he picked the right ones. He is now rich. His standard of 



Use of the Language of Private Property 123 

living during this process changed very little. He lived in the 
same house w^ith the same servants all along. His feeling of 
security, however, went from the top to the bottom and up 
to the top again. The guesses of his neighbors as to what was 
going to happen to him went through a similar cycle. He is 
happy again because he now has a secure place and privileges 
in a number of great industrial empires. 

There are, of course, people in this country who still own 
independent private property, but they are far down in the 
social scaleT Such people live in states like Vermont. They 
have scarcely: any cash income but are able to produce enough 
to eat and to heat their . homes. Home owners in smaller 
cities may have certain independent ownership of houses, 
but since they can neither heat nor light their homes, nor 
move from their homes to their place of work without call- 
ing on organizations, their ind^endence is pretty much of 
^fiction. Owners of business blocks in smaller communities 
are also somewhat independent and deal with individuals as 
tenants instead of great industrial governments. They are 
disappearing. Great moving-picture organizations and chain 
stores are getting control of business property in smaller 
towns and substituting claims on organizations for this 
remnant of private ownership. In large cities the process is 
complete. The erection of great office buildings has become 
a method by which an industrial government levies taxes on 
persons seeking old-age security by investment. The building 
of these magnificent structures prior to the depression was 
not dictated by the kind of motives which would make a 
profit-seeking individual build a building. 

Take for example a great real-estate concern, responsible 
for the financing of all sorts of business and residential struc- 
tures. Actual building had become a mere incident to the 
circulation of little pieces of paper, which in effect were a 
tax on the investing public by organizations who regarded 



124 T he Folklore of Capitalism 

the collection of that tax as more important than the build- 
ings themselves. Thus S. W. Straus and Company spent most 
of its energy supporting the slogan that they had never 
lost money for an investor.^ The long-time utility of the 
buildings for purposes other than selling securities was given 
little thought. The bonds were sold to men who had never 
seen the buildings and who cared little about them. They 
bought because they thought Straus would protect them in 
their old age.^ Straus built to extend its position and power. 

In the debacle which followed it appeared that the power 
of the Straus organization was not dependent on whether 

1 Wc quote from the findings in the case of People v, S. IV. Straus & 
Co., 285 N. y. Supp. 648 (1936), which arc also incorporated in the Re- 
port on Protective Committees of the Securities and Exchange Commission 
(1936), Part III, “Committees for the Holders of Real Estate Bonds,” p. 66: 

“After the defendants’ [Straus’s] many years of intensive advertisement 
to the effect that they issued real estate bond mortgages which were first 
liens in every respect, it can be readily understood that a heterogeneous pub- 
lic might well be misled into believing that it was actually purchasing first 
mortgage bonds when in fact the security received was one of a junior lien. 

2 Ibid. “As a result of tins intensive advertisement there was created in 
the public mind the impression and the belief that such bonds were the 
direct obligations of the defendant, S. W. Straus & Co., Inc. The examina- 
tion before the attorney-general of one Frank C. Schlitt, a salesman in the 
employ of one of the defendants, is illuminating on this point. Q. As a 
matter of fact, Mr. Schlitt, you realize that the greatest selling point you 
had was the fact that it was a Straus bond.^ A. Yes. Q. You told people it 
was a Straus bond.^ A. Yes. Q. You didn’t tell them that it was srniply 
underwritten and that Straus had nothing to do with the payment of the 
bond — you simply told them it was a Straus bond? A. Straus bond. . . . 
Q. You knew that thousands of people were buying these bonds in the 
belief that they were a direct obligation of Straus? A. That they were 
guaranteed by Straus. 0 * And you did nothing to disabuse the minds of 
these people to the contrary? A. Only when a customer would ask if they 
were guaranteed.’ “ 

The Securities and Exchange Commission states in the same report 
(p. 72): “Real estate underwriters consistendy concealed from investors ma- 
terial facts in connection with the earnings of properties securing issues 
which they distributed. But emphasis on the proved safety of their under- 
writings recurred constantly in their sales literature.” 



Use of the Language of Private Property 125 

the buildings themselves were profitable. It made profits on 
foreclosing and liquidating the properties by further manipu- 
lation of the paper symbols created when the buildings were 
erected.® The reason was that ownership of the buildings was 
a jgur e fi ction. The only important factor was the position of 
power which an organization had obtained and the fact that 
no other organization of equal power existed to take over the 
control.^ 

The Straus financing was not an isolated instance. In 
every field of industrial activity great organizations had 

^Idem, p. 168. “Afl examination of the property management fees re- 
ceived by S. W. Straus & Co. of California indicates clearly the importance 
of this business to the Straus organization. With the depression the under- 
writing business of this company vanished. For a period it confined its ac- 
tivities mainly to the purchasing and selling of securities. But in its at- 
tempt to maintain its sales organization it steadily lost money. By 1932, 
with the advent of numerous defaults in California issues sold by Straus, the 
trustees (Straus officials) had taken possession and were operating or super- 
vising the management of many properties through the company. The 
management and supervision fees received by the company transformed 
the previous deficit into a profit.** (The various types of patronage which 
were available to the underwriting houses on default arc described in detail 
in this report.) 

The entire five volumes of the Report of the Securities and Exchange 
Commission on Protective Committees arc full of the various ways in which 
control over financial reorganizations was kept by the organizations which 
had originally underwritten the securities. We quote a typical bit of testi- 
mony from Part III, of the report on p. 96: 

“Q. So when a bondholder finds himself in the predicament as the 
holder of a defaulted bond, what choice has he? 

A. Practically none. 

Q. He can go in, or stay out? 

A. And if he stays out, they bring on foreclosure, bid as little as possible, 
and he gets a small distributive share. 

Q. And if he goes in? 

A. He takes just what the committee wants. 

Q. And in many cases he cannot get out once he is in? 

A. Exaedy. 

Q. And there is no supervision over this committee that you know of 
under the law? 

A. No.** 



126 The Folklore of Capitalism 

built themselves into similar positions of power. They had 
done so under a mythology of private propexty which pre- 
vented those who were exploited from observing what was 
going on. The public saw the whole series of events as a series 
of horse trades by independent individuals. This mythology 
had become so completely misleading that men could not 
diagnose what was wrong when these corporate principali- 
ties failed to function, or why they injured so many people. 
The remedies proposed on the assumption that the corpora- 
tions were individuals working for profit came out wrong 
because the corporations were not individuals. It was as if 
men assumed that an automobile was a horse and tried to run 
it on hay. 

The class of people who could use these financial symbols 
realistically and unscrupulously rose to power, regardless of 
their efficiency as producers. They operated within a folk- 
lore which regarded the trading instinct as the salvation of 
the country. Traders are necessarily ruthless men. The eAics 
of tradirig is a series of ethical contradictions. Therefore, 
when everyone else had dropped the reins of power, this 
small group was in a position to seize them. Thus the Van 
Sweringens, who had acquired their trading skill in real 
estate, obtained control of great railroad enterprises. Small 
blocks of stock representing an infinitesimal part of the so- 
called partnership gave them power over an empire. The 
power thus gaine^d_3vas without any responsibility because 
these blocks of stocJk were thought of as private property. 
Men skilled in the tricks which could be played with these 
cards could always dominate experts in transportation when 
the control of a railroad was at stake. 

If one reads the careful investigation made by the Securi- 
ties and Exchange Commission into the activities of protec- 
tive committees in reorganization, one finds that those in 
control were almost alwavs financiers and not technicians. A 



Use of the Language of Private Property 127 

trading class was elevated to power who knew nothing of the 
techniques of the organizations which they led. Actual goods 
and services were dispensed by a great army of salaried tech- 
nicians who were given neither power nor security. Eco- 
nomics and law assumed that everyone was acquiring pri- 
vate property under 1the_impulsion of the "“^profit motive.” 
“You can’t get efficiency in operation without a profit mo- 
tive,” said the profound students of social organization. 

When such organizations got into trouble, the remedies 
proposed were formulated on the assumption that they were 
to be applied to mdwiduals who were exercising independent 
control of tangible things which they owned. Had there been 
a realization that these organizations were not dealing with 
private property, it would have been obvious that the remedy 
lay in giving the control to men with a different sense of re- 
sponsibility. The romantic legal and economic ritual of the 
time, however, was built up around the ideal that a trader 
without responsibility to the groups involved made the best 
general in an industrial army. In the situation which resulted 
only those could rise to power and rank who were more in- 
terested in the manipulation of financial symbols than in 
transportation, or housing, or the actual production and dis- 
tribution of any sort of goods. Position and rank obtained in 
this fiscal world had carried no social obligation because they 
were subject to the rules which governed the accumulation 
of private property. 

The Difficulty of Describing Industrial Organization 
in the Learned Terminology of the Time 

The objective observer who attempted to describe what or- 
ganizations were actually doing found it almost impossible 
to communicate his idea because there was no accepted termi- 
nology which could be used to describe the activities of an 



128 The FolJ^ore of Capitalism 

industrial or financial organization. Learning about such or- 
ganizations was divided into separate^compartments, each 
with its own experts. If the observer was a lawyer, he was 
supposed to stop on the threshold of economics and let some- 
one else do his thinking from that point on. If he was an 
economist, he was supposed to stop on the threshold of the 
law* If he was a layman, he was supposed to make only a few 
limited practical observations and then consult lawyers and 
economists as to the meaning of what he saw. No one could 
describe an organization as a complete whole and maintain 
ai^ pretensions to authority. 

In describing Tammany Hall and predicting whether it 
would be successful in maintaining its power in New York 
City, everyone recognized that the predictions must be based 
upon estimates of the quality of leadership and the morale of 
the organization. No one based his conclusion upon current 
quotations of the “assets” of Tammany Hall. No one “capi- 
talized” the disciplines, habits, morale, or spheres of influ- 
ence of that organization and called them private property. 
Men dealing with Tammany Hall did so practically and 
realistically. The reason why this was possible was that Tam- 
many lay outside the field of law or economics. There were 
no learned books written which could be consulted to find 
by formula whether Tammany Hall was a better organiza- 
tion for a man desiring influence and security in political 
position than the Vare machine. There were no brokers’ 
analyses or current quotations on political machines. 

It was impossible, however, to describe the industrial or- 
ganizations of the nation as political machines were de- 
scribed. The queer country of scholarship in law and eco- 
nomics, which was supposed to be the home of financial 
principles and legal rights which controlled these organiza- 
tions, could not be used as a whole by any individual. It was 
mapped out in little irregular patches of domain, staked out 



Use of the Language of Private Property 129 

and appropriated by different groups with names derived 
from Latin and Greek sources. It was all right for the neigh- 
bors to get together for a hc^sewarming, or for a coopera- 
tive effort in which the resources oFtheir respective princi- 
palities are joined for the common good. But when one man 
crossed to his neighbor’s domain to make maps and sketches 
of the fortifications, as if he contemplated changing the 
boundaries, he was greeted with suspicion and akrm. Schol- 
arship had its own capitalistic system and thousands of ear- 
nest and industrious men were dependent on the inability 
of men to think about organized society in practical and po- 
litical terms which cut across scholarly boundaries. They did 
not want their separate properties taken away without due 
process. They had spent endless effort building books and 
articles on those properties. The separation of powers be- 
tween lawyers, economists, and psychologists was a most 
important concept in the federation of independent intellec- 
tual sovereignties known as a university. 

Even inside these independent sovereignties learned enter- 
prise was far from communistic. The law had its own little 
fields within its larger field. Deans of law schools, when a 
“property man” resigned, sought to replace him with an- 
other “property man,” and would not hear of hiring a “con- 
flicts man” to take his place. Economics and psychology, and 
all the rest of the scholarly states, were divided along the same 
lines, and the rolling stone which rolled over these lines was 
permitted to gather a minimum of moss. 

Of course, these scholars knew that the tumbling stream 
of events was not divided this way and so great defenses were 
erected to keep these events from bothering their pious medi- 
tations. Actud eveatSJ^ere suppose^ 
poral world. The scholarjiyed in the spiritual worlj^qf prin- 
ciple arid formula. Political scholars were advised not to 
mingle in politics, trial lawyers were avoided in law schools, 



130 T he Foll^lore of Capitalism 

and advertising men were looked at with suspicion in facul- 
ties devoted to the study of the psychology of men in groups. 
When a real scholar wanted to visit the temporal world of 
events, he protected himself from its vanities by a pair of 
dark glasses called “the statistical method.” These obscured 
his vision so much that he could not see enough at any one 
time to contaminate him. 

Today, in spite of the fact that law and economics are as- 
pects of social psychology, a psychologist can enter the field 
of law and cooperate with jurists only provided that he take 
the word of sufficiently respectable legal scholars as to what 
the law is. If he makes his own observations, he is treated 
with the same scorn that an anthropologist describing savage 
customs would be treated with by the priests of the tribe he 
was observing. 

This reaction on the part of both economists and lawyers 
is natural and inevitable. It is part of the process by which 
newly observed facts become assimilated into an old religion. 
It may be compared to the impact of Darwin on the Church 
of England. It may also be compared to the reaction of the 
ethical philosopher at the beginning of the century toward 
psychoanalytical descriptions of “love” and “honesty.” The 
churchman and the philosopher felt their ethical world 
crumbling, just as legal scholars today feel their jurispru- 
dential world crumbling under the impact of an objective 
analysis. 

This frame of mind made the predictions of both lawyers 
and economists very bad indeed. In the first place, persons of 
such responsibility were not supposed to guess at all, but to 
seek certainty in a changing world. Guesses about the future 
power of any human organization or about the future activi- 
ties of any culture must take as fundamental factors an esti- 
mate of the morale and habits and disciplines of groups and 
also the quality of their leadership. The peculiar folklore of 



Use of the Language of Private Property 13 1 

lawyers and economists considered these factors the business 
of someone else. They were thought of not as part of law or 
economics but as confusing elements which marred the clean 
outline of those sciences. Therefore, such factors were put 
into separate compartments of learning such as psychology or 
sociology where they did not interfere with more orderly 
learning. 

In the second place, respectable people felt a moral re- 
sponsibility to prescribe the social bookkeeping of the next 
generation. This compelled them to take sides. “Is Mussolini 
worth the price Italy had to pay for him?” was a favorite 
topic. Something or other was supposed to be solved if this 
question was answered yes or no. There was a hint of im- 
morality about objective observation which did not take 
sides. It was like being neutral at Armageddon. This pre- 
vented such observation from obtaining a respectable place 
in institutions of learning. 

Finally, an ideal called “intellectual integrity” sterilized 
the efforts of many observers in the social sciences. Such 
people saw that creeds were never descriptive and that they 
suppressed the unpleasant facts about institutions in order 
to give them prestige. “Intellectual integrity” compelled 
these observers to become “realists” and to denounce the 
creeds as “bunk” and to “expose” them. There was a vague 
expectation on the part of some of the “realists” that this 
would start men to “thinking” and make them “intellec- 
tually honest” about their institution. Realists were ordinarily 
disillusioned about the entire human race because they saw 
through its ideals. Disillusioned people seeking comfort in 
a creed of “intellectual honesty” are poor diagnosticians. 

The power to make accurate guesses about a political situa- 
tion is of the essence of an understanding of government. Yet 
these are the very kind of guesses which educated men seem 
incapable of making. The more learned they are, the more 



132 T he Folklore of Capitalism 

books they read, the less accurate their guesses are. Politicians 
of the professional type are better at such diagnosis than 
men who have “thought the subject through” after the con- 
ventional manner. Hence politicians are the prevailing influ- 
ence in our government. 

The world of business organization was no better under- 
stood by the learned than the world of politics. From the 
point of view of the learned, Henry Ford’s ideas were naive. 
He constantly got mixed up about the lessons of history. This 
did not prevent him from being one of the most skilful or- 
ganizers of the age. He has had as much effect on our daily 
lives and habits as any man in his generation. Suppose he had 
acquired a corps of economists, lawyers, and social scientists 
to advise him from the inception of his enterprise. In that 
case someone else would have been in his place today. 

Let us go back to see what the thinkers thought about the 
automobile. Woodrow Wilson, the political philosopher, was 
gloomy about it. He said it would have an unfortunate effect 
on American democracy. Before the automobile we had had 
nothing which was an absolute mark of aristocracy. Now a 
distinction would be made between the rich and poor which 
would cause particular envy, because only the rich could 
afford an automobile. The poor man, driving a horse, would 
be covered with dust as the rich man passed by. 

Later, when the automobile industry was most vigorous, 
economists proved that there were too many cars. Instalment 
buying was going to decrease purchasing power and a col- 
lapse was imminent. The automobile was a luxury anyhow 
and economic theory of the time had much to say of the evil 
economic effects of spending for luxuries. The fact that a 
great organization was growing up which was keeping 
people busy was noted. But the strength and permanence of 
organizations, once they have acquired disciplines, habits, 
and morale, were not considered factors in making a guess 



Use of the Language of Private Property 133 

as to their future. Economists did not study personalities, 
habits, and disciplines. It was assumed that laws of supply 
and demand were more important. 

In thinking about an army in time of war, men made 
better guesses because they took these considerations into 
account. Also, in thinking about a political machine, ob- 
servers were more accurate because there was no law of sup- 
ply and demand to bother them there. There was no demand 
at all from the properly constituted economic abstract man 
for a political machine. Such illegitimate organizations only 
bothered him. Therefore, economic science had no place for 
them except as an excuse to show why economic law did not 
work better. For this reason men’s judgment about the 
strength and permanence of any given political machine 
could be based on observation, not principle. Their judgment 
of the future of the automobile industry was clouded by 
abstract principles. 

Had Ford followed current beliefs at any time, he would 
never have built his plant. He was, however, thinking in 
terms of organization. He did not understand the compli- 
cated fiscal world of the economist and hence it did not ham- 
per him. 

A technique of thinking consciously in terms of organi- 
zation did not exist among the learned. The times were un- 
congenial to its development as a dignified intellectual pur- 
suit. Religions require rounded systems of principles and the 
hope of certainty. Priests hate to think in the present. They 
want to build an intellectual edifice which will endure 
through the centuries. The realistic observer or diagnostician 
on the other hand knows that he cannot see into the future 
and that any of his guesses may be wrong. It was not re- 
spectable for learned men to be wrong. If a scholar made an 
error, it proved that there must be something loose in the 
machinery of his logical principles. Therefore, scholars could 



134 ^ Fol\lore of Capitalism 

not safely deal with the present. They were called propa- 
gandists if they did. They preferred to talk in terms of 
eternity. Every prediction had to have a fire escape to prove 
that the learned men would have been right had not some 
unsound persons appeared who mixed up the situation in a 
way that would not have occurred if people were more 
educated. 

The result was that Education became the cure for every- 
thing. Voters had to be educated, businessmen had to be 
trained, people had to be taught to respect the Constitution, 
and so on. The word ‘"education” was simply a substitution 
for preaching in a more mystical age. The phenomenon is 
one which always has occurred and always will. 

Therefore, while the guess of a technician has a fair chance 
of being wrong, the guess of a student of governmental or 
economic theory is almost sure to be wrong. This is not easy 
to prove, particularly to a theorist, because he can always 
show that he was right all along, since the words in which he 
puts his predictions are so vague and slippery. Yet a review 
of expert guesses made before the depression seems to indi- 
cate the truth of the assertion. Fred C. Kelly has written a 
most penetrating book called How To Lose Your Money 
Prudently,^ His answer is to give it to the most respected 
financial experts to invest for you. His proof of this point is 
complete and devastating. The book is not an attack on the 
integrity of financial experts. It is a discussion of the psycho- 
logical forces which lead men who have a profound theologi- 
cal grasp on the theories of finance into a succession of in- 
evitable errors. 

In larger affairs the diagnoses of the majority of those 
trained in legal and economic science were even worse. It 
was Walter Duranty, a newspaper correspondent, who made 


® Philadelphia, Roland Swain Co., 1933* 



Use of the Language of Private Property 135 

the most accurate analysis of Russia because he looked at it 
as a growing organization. Learned men at the time were 
proving that the Bolshevists could not succeed because they 
were departing from sound principles. In the same way they 
proved that Mussolini and Hitler were doomed to failure. 
During the 1936 campaign, and later while Roosevelt’s attack 
on the Supreme Court was going on, they proved that Fas- 
cism was about to sweep over this country because of the 
same forces which had made it so powerful in Germany and 
Italy. The most careful and scholarly lawyers, leaving out of 
consideration the limitations of the Supreme Court as an 
organization, proved conclusively that the Wagner Labor 
Act would be declared unconstitutional. There had been 
some doubt about the Agricultural Adjustment Act. A de- 
cision against the Labor Act was forecast with absolute 
certainty. 

Of course, particular economists and lawyers were not al- 
ways blind to these organizational factors. However, they 
could not base their public diagnosis on them without losing 
caste as dignified members of their professions and appearing 
like mere newspaper writers beyond the pale of learning and 
authority. 



CHAPTER VI 


A Platform for an Observer of Government 

In which it is suggested that since men are compelled to personify 
their institutions, the point of view of the psychologist toward 
such personifications may offer a useful platform for studying 
social problems. 

T he reason why old myths create such a problem 
in times when old institutions are not functioning 
effectively is that they induce men to act in direct 
contradiction to observed facts. Such conduct is of course one 
of the great cohesive forces of society, for when institutions 
are functioning effectively it is the power of superstition 
rather than the power of reason that holds them together. 
However, when the institutions have become impotent to 
meet social needs, these same superstitions have the effect of 
throwing respectable, moderate, and kindly people out of 
power because they cannot free themselves of the old myths 
long enough to be effective leaders. 

This is illustrated in the defeat of business leadership in the 
campaign for President in 1936. Here we had a powerful class 
of supposedly efficient industrial organizers, supported by 
most of the educated people in America, who were fighting 
for a principle. Their superstitions made them unable to cre- 
ate the new organizations which the times demanded. They 
also compelled them to fight, instead of seeking to gain con- 
trol of the new organizations which were arising. Their 
conduct in the campaign violated every canon of common 
sense. Long before the election it was obvious to anyone with 
the least political sense that Landon would be defeated. 
Nevertheless, the Republican party raised and spent ten mil- 



Platform for an Observer of Government 137 

lion dollars in ways which businessmen should have known 
to be idiotic. These men of common sense (when not emo- 
tionally excited and engaged in crusades) had apparently 
induced themselves to believe that America was in danger 
and that they had a chance to save her. The trouble with these 
individuals was their religious obsession during these trying 
times when practical common sense was necessary to preserve 
the unity and political machinery of the Republican party. 

The editors of the conservative press apparently convinced 
themselves that principles as sound as they thought theirs 
were must be victorious. They therefore could give no accu- 
rate picture of what was going on. 

The present status of fact-minded observations on govern- 
mental affairs can be pictured by comparing it with the 
diagnosis of a physician. Such diagnoses may be, and often 
are, wrong; everybody knows that they are only the guesses 
of experts. A consultation of physicians, however, does not 
descend to the level of oratory about principle. It gets its 
authority from the standards by which men judge the expert- 
ness of physicians. The best physician under these standards 
is not the one who can make the most powerful public speech, 
giving the reason for supporting his diagnosis. Ability to ex- 
pound reasons in public, which is the ability of an actor, has 
nothing to do with correct diagnosis or prediction. In fact, it 
usually obscures that ability. 

In order to lift fact-minded diagnosis of governmental 
problems into a respectable position so that the public gen- 
erally will have at least the same ability to select the best ex- 
perts as they now have to select the best physicians, it must be 
made respectable. 

We suggest therefore that the platform of the observer be 
the following: 

I. Institutions arc like personalities playing a dramatic part 
in society. They are to be judged by their utility in the distribu- 



138 The Volhjore of Capitalism 

tion of physical comforts and in the development of an atmos- 
phere of spiritual peace. 

2. When institutions fail to function, reforms must be at- 
tempted with something like the same point of view with which 
a trained psychiatrist reforms an individual. That point of view 
must recognize that an institution has something which may be 
called a subconscious mind. This means only that its verbal con- 
duct must be calculated to inspire morale and not to describe 
what it does. 

3. Law and economics arc the formal language of institutions 
on parade. 

We suggest this creed, not because it is an absolutely true 
description, but because it gives us a point of view which 
permits the expert to direct the play of affairs from behind 
the scenes without the feeling that he is engaged in an un- 
worthy procedure or that he is a mere politician. It recognizes 
that drama and ceremony are as important as food and 
shelter and overemphasizes neither. 

Of course, the writer does not know what an “institu- 
tional subconscious mind” is. The phrase is neither true nor 
untrue. Nevertheless, in the development of psychological 
techniques the word “subconscious” has become very handy 
to describe a different source of behavior from the ones which 
people have to take into account in the conduct of ordinary 
affairs of life. Its utility lies in the fact that it permits us to rid 
ourselves temporarily of moral rational judgment. It is there- 
fore convenient in describing individual conduct to use the 
term “subconscious mind” to describe the impulses which 
are not expressed in formulated religions and creeds. 

Of course, institutions are not like individuals. Neverthe- 
less, they are organizations in which men become bound 
together by habits and disciplines and ideals so that they co- 
operate in very mysterious ways. Getting food in New York 
City is not a planned operation. All sorts of taboos, beliefs, 



Platform for an Observer of Government 139 

illusions, struggles for prestige, loves, hates, lusts, and fears 
furnish the motive power which moves this tremendously 
complicated organization. Economics describes it as a strug- 
gle for money and credit among traders. This is obviously 
not true. The law describes it as a group of men following 
logical precepts. This also is not true. The device of the in- 
stitutional subconscious mind permits us to describe the theo- 
ries of law and economics as part of all these habits and co- 
ordinated social conduct, but not as controlling them. Such 
description requires a different kind of creed before it can 
be recognized as a legitimate occupation for seriqus men. 
This new observational creed necessarily must share the char- 
acteristics of all which made the old creeds acceptable before 
it can be used by the respectable and the learned. 

Let us briefly review those characteristics: 

I. The creed must be based on a very simple and understand- 
able ideal capable of personification so that the public 
may have confidence in it. 

For example, a popular personification of the physician is 
found in the term “Man in White.” This gives him a recog- 
nized place among our institutions and frees him from the 
necessities of public debate on general medical principles. 
The words have emotional associations with efficiency, hu- 
manitarianism, service, and whatnot. All physicians are 
“Men in White” today — experts and not orators. Compare 
this ideal of “Men in White,” which permits us to select the 
best physicians, with a current ideal of how the labor problem 
should be solved. The National Economic League, in a 
bulletin of July 15, 1937, devoted to “order and justice in 
employer and employee relations,” thought that the problem 
must be approached from a highly abstract angle before any- 
thing practical was even suggested. We quote: 



140 The Folklore of Capitalism 

NoTE—Some of our members have suggested that The National 
Economic League attempt to secure agreement as to the basic 
principles underlying the solution of the labor problem. 

Are not these principles the same as those governing our politi- 
cal order? It will undoubtedly be agreed that a stable political 
order must be based upon justice and democracy, and that effi- 
cient methods of keeping these principles alive and working arc 
equally important. 

In studying the labor problem is it not necessary to keep in 
mind, as of first importance, the question of justice, not only to 
labor but to all the other factors entering into production and 
distribution, including the consumer? Is it not essential, too, that 
democratic principles and efficient methods be adopted by em- 
ployers and employees in the consideration of questions affecting 
the interest of the workers and in respect to the organization of 
labor? 

Does this statement seem to you to be of value as a bac\ground 
for consideration of the problem? 

Vote of Vote of 

The National Council The Special Committee 

Yes: 444 No: ii Yes: 13 No: o 

(98%) (2%) {100%) 

In other words the idea expressed by this recent bulletin of 
The National Economic League is that in order to solve labor 
problems you must first get back and talk about the funda- 
mental principles of democracy. Suppose that cancer re- 
search, in a time when no one knew anything about cancer, 
started its experiments by laying down the fundamental 
principles which govern the disease as a preliminary step to 
discovering what it was. 

Other essentials of any creed, even the creed of an observer, 
are: 

2. The creed must be inspirational and therefore cannot be 
an accurate description. 



Platform for an Observer of Government 141 

3. The creed must not be so fantastically idealistic that it 

creates impossible standards. Impossible standards in- 
evitably create a conflict which leads in the end to the 
fulfilment of practical needs by nonrespectable people. 

4. The creed must not be realistic in the sense that it is an 

“exposure” of human frailty; it must be sweetened by 
what the realist is apt to call hokum. There is no room 
for disillusionment in an elective social platform. 

The Creed of a Political Observer Has Utility and Truth 
Only in Diagnosis, not in Action 

One of the most difiicult adjustments for modern intellec- 
tuals is the realization that different points of view have 
equal validity provided they are used in different settings. 
When one appears on the public stage to take part in some 
important ceremony, he should not question the assumptions 
on which that ceremony is based. Public debate of all kinds 
today, whether before a court or in a campaign, assumes the 
existence of group free will and a thinking man who will be 
persuaded. If that assumption is questioned on the stage, the 
advocate will be a failure. The reformer who questions it will 
spend the rest of his life condemning the human race be- 
cause its institutions are not what they pretend to be. Public 
management on the other hand is based on the assumption 
that men in groups are not rational. That assumption has 
given impetus to the various political techniques of industrial 
organization in which we excel. If public management is 
carried on under the assumptions of public debate only fail- 
ure will follow. 

The point of view which we are attempting to sketch here 
is one which allows a place to the folklore necessary for social 
organization, which does not mislead us with respect to its 
function in society. It is the point of view of modern psy- 



142 T he Folklore of Capitalism 

chiatry without its classifications. This attitude has not at- 
tained the dignity of a formulated philosophy. It is one which 
the realistic politician has taken all along. The task of the 
philosopher is to make it respectable so that respectable 
people can use it. 

Objective v. Rational Diagnosis 

I WILL illustrate the increased ability to diagnose and predict 
which this platform gives by describing the kind of diag- 
nosis and prediction which resulted from the pioneer work 
of the late Professor Edward S. Robinson of Yale, a psycholo- 
gist who chose to observe law and economics. Professor 
Robinson was gradually acquiring a technique which en- 
abled him to diagnose social conflicts and predict the results 
with startling accuracy. 

Late in 1932 I attended a conference in New York assem- 
bled by a gentleman of some prominence in the banking 
world, who foresaw in November the impending collapse of 
our banking system, which finally took place the next March. 
It was a small group of bankers, economists, and lawyers. 
The meeting was conducted in an atmosphere of intense 
gloom because everyone was convinced of two things: (i) 
That a collapse of the banking structure was imminent, and 
(2) that some drastic preventive measures were needed. On 
the question of the particular measures needed no two men 
of the group agreed. Everyone saw dangers in everyone s 
else plans. The meeting ended in complete disagreement (as 
all meetings ended in those troubled times, no matter who 
attended them). Everyone, however, agreed with the state- 
ment of a prominent lawyer, who said : * My mind fails to 
function when I think of the extent of the catastrophe that 
will follow when the Chase National Bank closes its doors. 

I returned to New Haven much depressed and saw Pro- 



Platform for an Observer of Government 143 

fessor Robinson, who remained quite unaccountably cheer- 
ful about the whole situation. I said: “But you don’t seem to 
realize that there is a crash coming.” He replied: “Did any 
of these experts specify in any concrete terms what human 
beings would do when the crash occurred?” I admitted that 
they had not done so. He asked: “Do you think that when 
the banks all close people will climb trees and throw coco- 
nuts at each other?” I admitted that this was a little unlikely 
but that a bank crash of this magnitude certainly sounded 
like rioting and perhaps like revolution. Professor Robinson 
replied : “I will venture a prediction as to exactly what will 
happen. When the banks close, everyone will feel relieved. 
It will be a sort of national holiday. There will be general ex- 
citement and a feeling of great interest. Travel will not stop; 
hotels will not close; everyone will have a lot of fun, although 
they will not admit that it’s fun at the time.” 

Months afterwards I happened to be in New York on the 
day that all the banks did close. I was amazed at the accuracy 
of Professor Robinson’s diagnosis. I had very little cash but 
was able to give checks at hotels for food and lodging with- 
out any difficulty. Everyone was excited and interested. They 
had something to think about and talk about. It was a great 
emotional release. Space doesn’t permit me to go into the 
reasons Professor Robinson gave for this guess. It was, how- 
ever, among all the predictions which I heard about the im- 
pending crash, the only one that was accurate. 

I will give another illustration. Nearly a year before the 
election Professor Robinson was commenting upon the press 
campaign against President Roosevelt, which was just get- 
ting under way. He said: “These anti-Roosevelt editors are 
all wrong. They completely misunderstand the effect of what 
they are saying and doing. Newspapers are a powerful in- 
fluence in this country. They will continue to be a powerful 
influence. However, the people who write the editorials and 



144 Folklore of Capitalism 

columns do not understand very well the nature of that in- 
fluence in our peculiar intellectual atmosphere. They arc 
now calling Roosevelt every possible name. Starting out with 
violent language, the language will necessarily become more 
and more violent. They cannot help themselves when they 
make it impossible to describe a really good picture because 
the words ‘colossal' and ‘stupendous’ have been used so fre- 
quently to describe inferior pictures that they have no mean- 
ing when applied to good ones. As the campaign goes on, 
attacks from newspapers will become more and more 
meaningless. Men caught in this type of psychology simply 
cannot stop. It isn’t anybody’s fault; it’s just something that 
is going to happen. 

“Now the effect of all this is going to be to make Roose- 
velt a popular hero. Take an illustration from dramatic tech- 
niques. The ordinary melodrama exposes the villain in the 
last act. The hero denounces him; the heroine points the 
finger of scorn at him and everyone goes away thoroughly 
disgusted with his conduct. But this exposure must take place 
at the end of the play. If it took place at the beginning of 
the play and kept up throughout the production, you would 
find that the villain was assuming heroic proportions and 
that the hero was becoming somewhat namby-pamby. The 
same thing will happen in this campaign because editors do 
not realize that a political campaign is a dramatic produc- 
tion. Their technical propagandists think it is something like 
advertising for tooth paste, in which a slogan becomes im- 
pressed on the public mind by constant reiteration until 
everyone buys the tooth paste. In fact, it is entirely different. 
The denunciation of Roosevelt is laying the ground for a 
triumphal march for him at the end of the play. This doesn’t 
mean that the press is losing its influence. It only means that 
the influence of the press on public opinion is not very well 
understood by the people who own the newspapers. News- 



Platform for an Observer of Government 145 

paper men are beginning to learn how an advertising cam- 
paign sells soap. They do not yet understand how to bring 
a political drama to a climax. That is a difficult technique, 
like producing a play. It may fail even in skilled hands. How- 
ever, it is bound to fail in the hands of people who think that 
dramas can be successful with high-pressure salesmen on 
the stage instead of actors. The press campaign is going to 
get results, but not the results the editors expect.” 

The accuracy of this prediction as to the results of the 
newspaper campaign was verified in a most startling way. 
Yet even after the campaign newspapers do not understand 
this phenomenon. As this is being written men are talking 
about the “waning influence of the press,” while the press 
is engaging in the same kind of attack against Roosevelt, a 
year and a half before the congressional elections. The trick 
of being tolerant between elections and starting a mass attack 
when the battle actually commences is not yet learned. 

Many politicians, of course, knew this. Roosevelt himself 
showed uncanny skill in leading the opposition on to mak- 
ing poorly timed attacks. The difference between Professor 
Robinson and the politicians was that he could tell better 
than they the grounds on which the prediction was based. 
This enabled him to communicate his technique to others 
who might improve it. 

Vrom the Observer s Point of View Law and 
Economics Are the Language of 
Institutional Personalities 

Mr. Justice Cardozo has said that law is literature. With- 
out changing his essential meaning, I prefer to call it lan- 
guage, because only the best of it (which includes his de- 
cisions) can be dignified as literature. Most of it is common- 
place language in which very commonplace unliterary men 



146 T he Folklore of Capitalism 

conduct their disputes. The same observation can be made 
of economics. Both of these sciences are the formal means 
of expression when institutions are parading in their best 
clothes or else when they are fighting battles. 

If this is true, it would follow that a parallel could be 
drawn between the ordinary language of the time and the 
legal and economic language of the time. The methods of 
growth should be similar. The struggles between good gram- 
mar, whether economic or philological, and the common 
and vulgar means of expression should be the same. We 
should find the economic grammarian and the language 
grammarian both striving to keep unsound constructions out 
of their languages and we should expect that they would 
always fail. We should expect to find economic and legal 
language being constantly enriched by new words taken 
over from nonrespectable groups, just as ordinary language 
is enriched by words taken over from prostitutes and con- 
victs. 

An examination of H. L. Mencken’s book, The American 
Language, shows how close this parallel is. Human institu- 
tions must talk in the language of their folklore. They do not 
invent that folklore. It grows as language grows. Each class 
of society from the criminal to the preacher contributes. In- 
deed, the so-called lawless element of society contributes far 
more to economic and legal theory than anyone imagines. 

Mencken’s book is outstanding because he is not interested 
in grammar or the correct use of words. His story of the de- 
velopment of language is told not from the point of view of 
how it ought to be spoken, but how it is spoken. In reading 
this book, I obtained for the first time a grasp of language as 
a living force, reflecting the moods and spiritual struggles of 
a people in the strange new words, bad and good, which 
were constantly flooding in. Groups which experience the 



Platform for an Observer of Government 147 

greatest conflict between respectable attitudes and practical 
needs are the source of most new words; i.e., the nonrespect- 
able classes, engaged in sub rosa but very necessary social 
activities. Seeking a way to describe themselves, since society 
has denied them a position of dignity, they create a language 
of subtle satire and attack. This is the philosophy of one de- 
nied a seat in the church who thumbs his nose at the preacher 
in order to maintain his own morale. Thus a woman became 
a “moll,” a “twist,” etc. A thousand dollars, instead of being 
“money” or something to be invested to insure a respectable 
position, is correctly described by the importance which its 
possession gave in a social hierarchy. It is called a “grand.” 

As one reads this book on language, one learns that the 
tempo and accent of legal and economic theory ape the tempo 
and accent of language. In pioneer conditions when language 
is full of exaggeration and braggadocio, governmental theory 
follows the same pattern. In conditions of dull and learned 
respectability, men’s common talk becomes dull and learned, 
full of complicated evasions of facts. So we find the same 
pattern in their economic and legal theory, or ideology of 
governmental and industrial institutions. Russia today has 
the pioneer conditions, together with the language and gov- 
ernmental theory of braggadocio and extreme exaggeration. 
When new pioneering organizations are striving to become 
logical and respectable, they adopt the extreme dogmatism 
of Communism and Fascism. They become violent and un- 
tactful in their attempts to prove they are superior to others, 
and this conceals an inner sense of inferiority. When insti- 
tutions are content to remain nonrespectable, they use both 
the language and the economic theory of cynics against 
those who deny them a place in the sun. Thus the language 
of sub rosa groups is vulgar, but sharp and pointed. It ap- 
pears new and fresh to the respectable because it reflects a 



148 T he Fol\lore of Capitalism 

different point of view. Legal and economic theories are in 
reality nothing more than huge compound words with high 
emotional content. 

The language of medicine, which once was a moral and 
theological debate over principles, has become to a large ex- 
tent a pure nonphilosophical tool. So also are most of the 
theories of medicine. Men are not shocked and enraged at 
cancer, as they are at civil war in Spain, although the two 
have curious similarities from an organizational point of 
view. Men take sides in the one case, and not in the other. 
Their words and theories reflect this attitude in each case. 
They are dull, but descriptive. Neither the words nor the 
theories are fitted for the debate or dinner-table conversation 
of the “thinking man.” 

Mencken’s book on the American language is a far greater 
contribution to the study of political institutions in America 
than Mencken himself realized when he wrote it. It shows 
how attitudes are reflected in the way men talk about their 
organizations. And legal and economic theory is nothing 
other than a way of talking about organizations. It also 
shows how the words affect the attitudes, crystallize them, 
make them stereotyped, and finally form the cement which 
binds the organization together. 

Thus we see that new language does not arise and new 
words never come into currency apart from particular or- 
ganizations. Esperanto has never been and never will be- 
come a current language any more than utopian socialism 
will become a current economic language. Language comes 
into being because particular organizations must express 
themselves and organization does not thrive without some 
sort of need. The gangster with a racket is an answer to com- 
petitive conditions in which current ideals refuse to permit 
sensible organization. For example, one of the most fre- 
quently recurring rackets is in the distribution of milk. Here 



Platform for an Observer of Government 149 

we have complete anarchy in the distribution of a necessity. 
Milk companies compete to such an extent that often a num- 
ber of different companies will send expensive trucks to de- 
liver milk to the same floor of a large apartment house. One 
man and a horse (which stops and moves on without the 
driver climbing in and out of the cart) can distribute milk 
far more efficiendy. Only if competition requires that milk 
be carried long distances with speed to scattered localities 
are trucks required. 

In such a situation, respectable theory refuses to compel 
milk companies to apportion a city into areas in order to op- 
erate efficiently. Practical distribution of milk is supposed to 
create an inefficient bureaucracy or else interfere with our 
liberties, solely because it has become burdened with the of- 
fensive words ‘‘government interference with business.” 
Hence a situation arises where organized sub rosa effort 
thrives. Gangsters are able to gain a large measure of control 
over the milk business because there is need for some sort of 
control and no one else will exercise it. 

In labor conflicts public government is not permitted to 
take the necessary control. Therefore, large corporations are 
found hiring their own gangsters and spies on the theory that 
one must fight fire with fire. However, it is not a respectable 
spy system with the romance of the wartime spy. General 
Motors puts in operation a spy system with a language and a 
theory and a set of loyalties peculiar to the criminal class 
since this is the only class which is effective when working 
against a taboo. Its high officials hate to think or talk about 
the system in public. They deal with liars and traitors because 
the lack of scruples of such people makes them more effi- 
cient in furnishing strikebreakers. The more respectable 
elements of the organization are pained by this phenomenon 
in exactly the same way that the statesman is pained at hav- 
ing to deal with a political machine. 



150 T he Volhjore of Capitalism 

Such conflicts give rise on the one hand to complicated 
theories to explain and dignify the respectable institutions 
and on the other to satiric words to give the nonrespectable 
organizations some sort of standing. Thus the labor contro- 
versies in this country have been responsible both for Mr. 
Justice Sutherland’s beautiful theories that minimum wage 
legislation for women destroys their freedom of contract, and 
at the same time for the picturesque terminology of the 
‘‘finks” and “nobles” of the strikebreaking fraternity. The 
language of nonrespectable institutions is sharp and pungent 
at best and obscene at its worst. The language of authori- 
tarian institutions is invariably solemn, learned, statistical, 
dull, and dry at its worst, filled with rhythm and eloquence at 
its best. 

For example, one cannot read the argument of George 
Wharton Pepper in the famous Agricultural Adjustment 
Act case without being impressed both by its rhythm and 
beauty and its complete lack of descriptive meaning. It calls 
forth dreams of a beautiful past when government and busi- 
ness lay down together like the lion and the lamb. It com- 
bines poetry, law, and economic theory the way they should 
be combined for effective advocacy of a subject which falls 
equally within all these mysteries. I am not trying to be sa- 
tirical at the expense of George Wharton Pepper, because 
I admire his argument immensely and strive to imitate his 
style when I am before a court. I am trying to show how the 
final residue of statistics, learning, and law, which constitutes 
the language of respectable institutions, protects those insti- 
tutions against the crude, coarse facts which intrude into 
their imaginary world. 

It is important to make clear that throughout this chapter 
I am not talking about the use of words as a sort of verbal 
pointing, which is the kind of language found in books full 
of technical description of concrete things. I am referring to 



Platform for an Observer of Government 15 1 

the terms which make up philosophy and convey moods and 
attitudes. 

The difference between what may be called “verbal point- 
ing” and the philosophical terminology is that the former 
may be used by anyone who is familiar with the objects to 
which it refers. The latter is an essential part of an organiza- 
tion and has no meaning whatever to one who doesn’t know 
the place which that organization fills. 

Therefore, when the conflict between magic words and 
reality becomes so keen that the words themselves are losing 
their effect, we find that authoritarian organizations arise 
to give these words greater force. For example, we have 
never been absolutely sure about our law. There has always 
been an uneasy feeling that lawyers are tricky fellows (as 
compared with economists), and that the language of the 
law is a devious kind of logic. Therefore, the judicial insti- 
tution is worshiped because it seems to prove that at least 
within its priestly portals the language of the law is used 
with truth, with logical finality, and with authority. 

Our economic creed, however, has been usually so implic- 
itly accepted that ordinarily all one has to say is “thrift,” or 
“the law of supply and demand,” or “balance the budget,” 
and the evil spirits disappear. Therefore, no supreme court 
of learning has ever been needed to personify the authority 
of economics. 

However, if the conflict between words and practical needs 
becomes keen enough, a supreme court of economic theory 
will appear. This is illustrated in a larger way by the recent 
unconscious attempt of the Supreme Court of the United 
States to make the Constitution the final word in economic 
as well as legal theory. The Court was simply responding to 
the pressures which demanded authoritative order when the 
magic words were losing their magic. 

In a smaller way this recnforcement of magic words by 



152 The Folklore of Capitalism 

magic institutions in times of conflict can be illustrated by 
two events within the memory of the reader. 

The first is found in the great prohibition experiment, 
which has now receded so far into the past that we can under- 
stand it. Here men felt an intense spiritual conflict. They 
wanted the nation moral and dry in principle and at the same 
time wet in fact. Prohibition enforcement, which like all le- 
gal process had to represent a compromise, became entirely 
ceremonial. Only in this way could it represent the various 
conflicting ideals to which men felt they had to cling in the 
prohibition era. Convictions of highly selected types of boot- 
leggers ceremonialized respect for law. Acquittals of others 
celebrated individual liberty and the integrity of the home. 
As a sub rosa political organization grew up to fill the prac- 
tical need, the conflict became keener. Learning was called 
in. Statistics were collected. Books were written. Finally the 
conflict reached the stage where it required an authoritarian 
tribunal. Automatically there arose the Commission for the 
Study of Law Observance and Enforcement, popularly called 
the Wickersham Commission. Great lawyers and educators 
sat on its solemn bench. While this commission was study- 
ing everybody felt better. They expected a rabbit would 
surely appear out of such a high silk hat. For a while this 
confident expectation resolved the conflict in the same way 
that the Supreme Court of the United States is continually 
resolving other like conflicts for us, when we insist on be- 
lieving two opposite things at once. A rational country, de- 
voted to statistics, was about to apply modern scientific 
method consisting of reason and statistics to a social problem. 

Of course, when the report came out, it simply restated, in 
more complicated language, the conflict which everybody 
felt. It was, however, a useful and indeed an inevitable step 
in the solution of the problem. Reason and dialectic arc al- 
ways called on by government today to supply the prophetic 



Platform for an Observer of Government 153 

vision that killing geese supplied for Rome, that the Delphic 
oracle supplied for Greece, and that prayer supplied for the 
statesmen of the last century. The effect of resorting to prayer 
was to make men become practical after the emotional fervor 
had been allowed to dissipate itself. By such ceremonies the 
gods of prohibition resigned in favor of technicians. 

Today we see almost the identical situation in the problems 
of relief and of unemployment. Everyone insists on pretend- 
ing that the country must balance its budget. But the litera- 
ture of budget balancing is one of sorrow and not of hope. 
There is a very complicated set of absolutely contradictory 
ideas behind this apparently simple phrase. Budget balanc- 
ing requires that relief be cut down at a time when there are 
available goods to be distributed to the needy. Our religion 
of individualism, which once was strong enough to starve 
people for moral reasons, has lost this potent magic. There- 
fore, we must take care of the needy and balance our budget 
at the same time. As is inevitable, a great literature has arisen 
out of this conflict. As this is being written there is a religious 
and mystical war going on in Congress. Roosevelt suggests 
one and a half billions. This is because he wants to balance 
the budget. Certain devoted priests want to balance it still 
more. There must be no compromise on a principle like this 
because if we compromise the principle flies out the window. 
Economists argue. Editorials are written. No one seems to 
be getting anywhere. The Supreme Court, once the great 
settler of spiritual conflicts through a mystical constitution, is 
in temporary difficulties. Anyway, the budget is not a legal 
problem. 

In such a situation something like the Wickersham Com- 
mission is yearned for. Let us submit the troublesome prob- 
lem to an oracle. At first this yearning takes the form of a 
demand for a census of the unemployed. All the intelligentsia 
take up the cry. Census technicians realize the folly of such 



154 ^ Foll^ore of Capitalism 

an enterprise because the problem is one of distribution 
of goods, not unemployment. Many persons who are sup- 
porting families on an income of $250 a year are “employed.” 
Everyone realizes that the census will not tell us how to bal- 
ance the budget and also provide for relief. The demand for 
an authoritarian commission gathers force. Finally the head- 
lines of the New Yor\ Times read as follows: 

BILL FOR JOB STUDY RUSHED TO SENATE 
TO HALT RELIEF CUT 

The Senate Committee on Education and Labor voted today to 
report favorably the Murray-Hatch resolution calling for the ap- 
pointment of a Federal commission to study the general problem 
of unemployment and relief. The action was regarded as an im- 
portant step preliminary to the expected fight in the Senate over 
the relief appropriation of $1,500,000,000 which the House will 
approve early next week (May 23, 1937). 

We have thus repeated almost exactly the process by which 
the conflict over prohibition was resolved. If it were not for 
this conflict between ideals and practical needs in the ques- 
tion of relief, no one would think of such a commission. For 
example, if we transfer the same situation to a time of war, 
the problem becomes only one of organization to get the 
available goods around. It is not necessary to reconcile the 
need to distribute food with budget balancing. The only 
limits are those of supply, production, and transportation. 

Once we have recognized that support of the needy is a 
legitimate social objective, we can become practical about it. 
Until that time conflict will have to be resolved by learned 
Investigation. If the commission which is contemplated ac- 
tually sits on the unemployment or relief problem, it will 
end by representing the same split in opinion now repre- 
sented in the Congress which asked for the commission. If 



Platform for an Observer of Government 155 

the conflict is resolved more quickly, there will be no such 
commission. 

Let us examine in more detail the conflicting ideals that 
whirl around the related problems of relief, employment, dis- 
tribution of goods, and budget. A page from the l^ew Yor\ 
Times on May 24, when the conflict was at its height, will 
serve as an illustration. In the left-hand column Edith Abbott, 
dean of the School of Social Service Administration of the 
University of Chicago, holds forth. We quote portions: 

Miss Abbott painted a dark scene of “misery and privation in 
what we like to call a land of plenty” and took President Roose- 
velt and Harry L. Hopkins, Federal Relief Administrator, par- 
ticularly to task for “that tragic decision made by the Federal 
Administrator and his chief” to withdraw funds for direct relief, 
with the liquidation of the FERA. 

The next column has the following headlines: 

HAMILTON CALLS FOR DIRECT RELIEF 


Substitution for WPA Would Save 40 Cents on the 
Dollar, Republican Chairman Says 

In the next column we find: 

URGES END OF WPA TO SAVE A MILLION 

Gebhart of Economy League Wants the States To Share 
Evenly with Government 


Sees 8-Fold Cost Rise 


He Says Expensive Works Have Led to That Increase 
Over Worst Depression Year 

And, finally, on the same page. Senator Byrd of Virginia 
takes the courageous but paradoxical position of opposing a 



156 T he Folklore of Capitalism 

$1,500,000 appropriation to build houses for mountain fam- 
ilies in his own state. They can’t afford such nice houses, he 
says. It is gross waste and inefficiency to build them : 

Senator Byrd today called upon Secretary Wallace to investigate 
charges of “gross waste and inefficiency” in connection with the 
Shenandoah Park homesteads in Virginia, a $1,500,000 Resettle- 
ment Administration project, and, if the charges are sustained, to 
“salvage what you can of this allocation and return it to the pub- 
lic Treasury to be applied to reduce the deficit in our revenue.” 
{New Yorf{ Times, May 24, 1937.) 

All three men agree on the great principle opposing ineffi- 
ciency and extravagance. However, anyone who thought 
that these people could agree on any plan of practical action 
would be badly misled. 

We may bring the situation into clearer light by compar- 
ing it with one in which there was no spiritual conflict, the 
attempted rescue of Amelia Earhart. In discussing this situa- 
tion the writer makes no decision as to whether providing 
somewhat expensive houses for people in need is a more 
beautiful ideal than rescuing a national heroine from the 
ocean. It might be argued that we could not provide all 
people in need with such good houses. It would be equally 
true that we could not spend such vast sums to rescue every- 
one lost at sea. Such discussions are only confusing. We use 
the illustration simply because the doubts about spending 
every available national resource in the rescue of Amelia Ear- 
hart were confined to very few people. There was no real 
conflict. 

Had there been a conflict, the rescue would have proceeded 
along the lines of the housing project. First, plans would have 
been made for the use of the best planes to search the ocean. 
Then, when this extravagance was attacked publicly, cheaper 
planes would have been used. By the time that this device 



Platjorm for an Observer of Government 157 

had received condemnation for inefficiency, the rescue would 
have been changed from a practical, efficient endeavor to a 
public debate about general principles. Everyone would have 
agreed diat people in distress must be rescued. They would 
have insisted, however, that the problem was intimately tied 
up with balancing the national budget, improving the char- 
acter of people lost at sea, stopping the foolhardy from ad- 
venturing and at the same time encouraging the great spirit 
of adventure and initiative and so on ad infinitum. They 
would have ended perhaps by creating a commission to study 
the matter statistically, take a census of those lost at sea, ex- 
amine the practices in other countries. What was saved in 
airplane fuel would be spent on research so that the problem 
could be permanently solved. 

It is that kind of confusion which is illustrated by this page 
from the New Yorf{ Times. These four people agree on bal- 
ancing and on the advisability of shelter even for the needy, 
but cannot agree on any practical plan of action. Let us read 
further the report of Miss Abbott’s speech. 

In comment on complaints about the mounting cost of social wel- 
fare, Miss Abbott decried “that enormous section of the Federal 
taxes that goes for the army and navy, the Veterans’ Adminis- 
tration, the national debt incurred for war purposes, and all other 
expenditures for past and future wars. 

“Then,” she went on, “there is all the money wasted to re- 
ward the political friends of the successful party. I am sure you 
will agree with one that this is the real boondoggling — the truly 
vast expenditure that brings no useful return.” 


“Look at the reports of the RFC and read of the billions that 
went for banks, railroads and all the rest of that vast pro- 
gram. ...” 

She said that the cost of the War and Navy Departments and 
the cost of past wars was close to $4,500,000,000 a year. The cost 



158 T he Folklore of Capitalism 

of all Federal social welfare activities, including prisons, she 
added, was about $250,000,000 a year. 

“The money so desperately needed for social welfare is already 
collected by taxation, but it is spent for past and future wars.’" 


“But it is important also that we should continue to take note, 
as we did last year, of the wasteful expenditures of public funds 
to take care of political friends of the successful party. ...” 

You will note that Miss Abbott considers the abolition of 
war expenditures and the removal of patronage and politics 
from political organizations as somehow connected with the 
day-to-day relief problem. Such a position, of course, prevents 
immediate practical action because it complicates the prob- 
lem by adding a disarmament conference, plus an attack on 
Mr. Farley, to an already full calendar. Hamilton, Gebhart, 
and Byrd might agree on Miss Abbott’s general principles, 
but they would quarrel very violently with each other as to 
the place the social worker should take in the administration 
of relief. Hamilton would probably remove Democratic poli- 
ticians, but not all politicians. Byrd would certainly remove 
social workers, but not soldiers. 

Since there is no leadership here, but only a conflict of 
moral ideas, this means that the resulting administration of 
relief must be confused. If it moves along in one of the lines 
suggested, it will get opposition from all the others. 

Let us analyze Mr. Byrd’s attack on housing. He thinks 
the housing is too expensive for the poor mountaineers. He 
denies that houses built in Virginia add to the wealth of ei- 
ther Virginia or the country unless the kind of bookkeeping 
with respect to these houses accords with his own fiscal ideas. 
These fiscal ideas are to him more important than the houses 
themselves. So much for the larger issue. 



Platform for an Observer of Government 159 

However, in spite of Senator Byrd’s objection, a few houses 
are built. In the building of them we note the same atmos- 
phere creating the same sort of conflicts all over again. This 
may be illustrated by describing some of the troubles of the 
Government Housing Administration. In the first place, the 
Government must choose the best and most respectable ar- 
chitects on its planning board. If it does not do so, it will be 
playing politics by not choosing the most patriotic and re- 
spectable men. The best and most respectable architects are 
those who have been building skyscrapers. They want the 
very best materials used. Their plans for government hous- 
ing, therefore, are much more expensive than they would be 
in the case of a private structure, for the reason that the archi- 
tects can make public speeches if the Government opposes 
them, which they cannot do in the case of a private employer. 
A compromise is finally reached. But the houses are all of a 
more permanent character due to a moral objection to the 
Government’s putting up flimsy constructions, which docs 
not apply to a private construction. 

Bids are called for. A group of contractors offers better 
materials than are specified in order to freeze out competi- 
tion. They figure that they will make it up later. Architects 
favor contractors who give the Government more than the 
letter of the contract requires. This gives the advantage in 
government bidding to a small group. Once that group has 
established its position, a curious phenomenon called “price 
leadership” keeps the members from chiseling on one an- 
other. Their influence with the architects is such that out- 
siders have a difficult time breaking in. There is nothing nec- 
essarily corrupt about this process. It just happens. 

The fixing of prices by what is called “price leadership” is 
furthered by another moral idea which arises from the at- 
tempt to keep politics out of government. This idea is that 
the Government cannot be trusted to accept private bids. All 



1 6o T he Fol f{lore of Capitalism 

bids must be opened in public. Now it so happens that no 
building corporation in the group likes to start a public war 
against the other building corporations. Therefore, if the 
bids are public, they all follow list prices and the bids are 
practically identical. Where bids are private, a member of 
the group needing the business is very apt to make reduc- 
tions on many of the articles; where in doing so he invites 
various kinds of retaliation from his competitors. This proc- 
ess makes the prices which the Government pays for con- 
struction a good deal higher than the prices contractors pay 
for construction. It also tends to create more expensive con- 
struction. 

In turn these circumstances give support to the argument 
that the Government should not build houses at all. Build- 
ing should be left to private business. However, the purchas- 
ing power of a third of our population is such that private 
business cannot build any houses for them at any price. 
Therefore, we have a situation where no houses can be built. 
If the demand is great enough, houses will be built by the 
Government, but the conflicting moral ideas will require 
them to be built under a blaze of oratory. The administrator 
who builds them must be not only an administrator but a 
skilful politician. He cannot concentrate only on building 
houses. 

There is no answer to this problem except to say that as 
the governmental organization to build houses acquires 
strength it gets rid of most of the incidents of the conflict. It 
becomes as eSicient as most of the private organizations 
which do the same thing. Indeed, it probably becomes more 
efficient because the standards of criticism which apply to it 
are much higher. In other words, no government project to 
build anything is ever as bad as the West Side of Chicago, 
which has been produced by private industry. Nor does it 
produce anything as foolish as the New York skyscraper. No 



Platform for an Observer of Government i6i 

one will believe this, however, so long as the standards of 
the day judge governmental organizations only by their fail- 
ures and private organizations only by their successes. 

All this lies behind the four theoretical articles condemn- 
ing extravagance by government and reciting familiar eco- 
nomic slogans to support that attack. 

There is a subtle difference between the point of view I 
am trying to describe and the realistic or debunking philoso- 
phy. The difference is this. The fact-minded observer is one 
who realizes that disillusionment about the human race is 
a futile attitude. To call a nation stupid indicates an emo- 
tional state which prevents effective study of its habits. A 
horse breeder does not call horses stupid but takes them as 
they are. He refuses to invent a mythical horse in compari- 
son with which his own horses appear in an unfavorable 
light. There is today no evidence that the human race is going 
to be able to get along without a priesthood, whether it be 
religious, or civil, or economic. The fact-minded observer can 
recognize this fact and utilize it. Observations which are fre- 
quently heard, such as that it is surprising organizations like 
the American Bar Association should resist social reform, 
simply show the lack of understanding of the forces which 
create the American Bar Association. Statements of alarm 
because of the so-called failure of “intelligent leadership” 
simply prove that the speaker doesn’t understand the part 
which ideals play in social organization. He doesn’t realize 
that organizations come first and creeds are built around 
them afterwards. The fact-minded observer is not one who 
thinks that he can formulate a new religion or a new philoso- 
phy for a group. The religion for a new organization may 
be selected out of the mass of conflicting ideals which exist 
in the culture by processes not unlike the development of 
language. It is as impossible to get people to adopt a new 
creed as it is to get them to talk in a more convenient Ian- 



i 62 The Folklore of Capitalism 

guage like Esperanto. For example, if we lived in an atmos- 
phere of chivalry, we would have no basis for predicting capi- 
talistic economics. On a smaller scale, if we looked at the 
financial organizations at the time of the Civil War, we 
would have no basis for describing the fantastic symbolism 
of the present holding company, which unquestionably has 
worked after its fashion. 

Nevertheless, the fact-minded observer need not be a pes- 
simist. Acting within the limited range of day-to-day possi- 
bility, his observations may enable him to make guesses as 
to how current symbols may be used to obtain slight ad- 
vances. The analogy to the breeder of horses may be useful. 
His methods improve the speed of his animals little by little. 
He would be a failure if he attempted to breed rubber-tired 
wheels on the horses. 

The fact-minded observer will know that in a rational age 
social planning is required in order to convince people that 
they are not adrift on tides of time and circumstance. He will 
realize, however, that the social plan will primarily be use- 
ful only as a slogan and it should be adapted for that pur. 
pose. He will not expect logical adherence to it. He will know 
that if the attitude toward any organized project changes, 
so that social planning is no longer necessary and oppor- 
tunistic action becomes respectable, the institution will be 
enabled thereby to become more effective in reaching its 
practical objective. 

And, finally, he will realize that this objective platform 
is not a universal truth. It is only a tool for diagnosis. Every- 
one will not become a student of government. Most people 
will think in terms of a religion of government. For the pub- 
lic generally, all that is needed to make this point of view 
effective is that it be tolerated in those who manage and study 
governmental organizations. 



Platform for an Observer of Government 163 

To diagnose such conflicting situations requires a realiza- 
tion that there is no particular use in getting angry about it. 

Medicine has progressed from the theological attitude of 
the medieval University of Paris to the practical, nonintel- 
lectual technique of the modern hospital, where they haven’t 
time to formulate logical philosophies explaining why they 
try to cure people. There are signs of the same kind of change 
in attitude toward the study of social organizations. 

As a formula for an objective philosophy of government, 
a slogan now current in individual conflicts might be used. 
That slogan is “Be an adult and avoid infantilisms.” It sym- 
bolizes, as well as a phrase can, an attitude which can face 
facts. 

However, those using it should remember that like all le- 
gal and economic creeds it is inspirational and not descrip- 
tive. What a truly adult human race would be like the writer 
cannot imagine. Harry Stack Sullivan once described the 
adult personality as follows: “And now, when you have 
ceased to care for adventure, when you have forgotten ro- 
mance, when the only things worth while to you are prestige 
and income, then you have grown up, then you have become 
an adult.” 

The so-called Copernican revolution had a significance in 
human culture far beyond the specific astronomical discov- 
ery. For the first time, in ceasing to think of the earth as the 
center of the universe, men began to look at it from the out- 
side. Amazing advances in man’s control over his physical 
environment followed that change of attitude. Discoveries 
were made which would have been impossible for men 
bound by earlier preconceptions. Today there is beginning 
to dawn a similar change in attitude toward creeds, faiths, 
philosophies, and law. Looked at from within, law is the 
center of an independent universe with economics the center 



164 The Folklore of Capitalism 

of a coordinate universe. Looked at from outside, v^e can be- 
gin to see what makes the wheels go round and catch a vision 
of how we can exercise control, not only of the physical en- 
vironment, but also of the mental and spiritual environment. 
When men begin to examine philosophies and principles as 
they examine atoms and electrons, the road to discovery of 
the means of social control is open. 



CHAPTER VII 


The Traps Which Lie in Definitions and 
Polar Words 

In which wc digress for a moment to explain how difEcult it is 
to describe a culture of which you are a part and to point out the 
traps which lie in polar words. 

O NE who would escape from the culture of his own 
time long enough to view it from the outside, as 
the historian views the French Revolution, or the 
anthropologist views a primitive people, must beware of the 
hidden traps which lie in the terminology of that culture 
which he must necessarily usS 1He is confronted with the 
same difficulty the anthropologist would face if he had to 
write his observations in the language of the tribe he was 
observing. He would find all the words used in connection 
with their sacred institutions so heavily freighted with little 
mental pictures of the ideals and phobias of the tribe that 
they would imperfectly describe the actual moving effect of 
those ideals on the tribe. This is such a dangerous handicap 
to one who describes modern society that it is necessary to 
digress from our main theme for a chapter in order to ex- 
plain it. 

We may take an example from the development of physics. 
In the last century the terminology of physics was tied up 
with little mental pictures of a world composed of matter 
and energy. Matter was little lumps, of which the atom was 
the stalest. Time was a sequence. Space was a frame. These 
word images were taken from the general images of the day. 
They could not be used to describe a world in which time 
was a dimension and matter a form of energy. 



1 66 The Folklore of Capitalism 

Today we realize that wordjjrnagcs of ordinary cHscourse 
cannot be used to describe the phenomena of physics. They 
are too hopelessly^confused with the view of the universe as 
made up of little lumps of matter. Einstein’s great contribu- 
tion to science is the fact that he made men realize that men- 
tal pictures had their distinct limitations as scientific tools. 
He escaped from these little pictures throu^ symbols of 
mathematics which had the advantage of carrying no con- 
crete mental images along with them. The fourth dimen- 
sion and the Riemann metric, both of which Einstein used, 
cither mean absolutely nothing when translated into 
language or they become completely absurd. However, when 
one gets used to them, they appear to have meaning enough 
to use, just as the symbol for zero is treated as a number in 
mathematics. 

The term ‘‘subconscious mind” in psychology has no mean- 
ing. Yet we think it has and thus it becomes a handy tool. 
We never stop to define it. Whenever we stop to define it, we 
get all mixed up and decide there is no such thing. Then we 
go ahead and use it just the same. Words which are useful 
in one kind of discourse are not useful in another. The term 
‘Virtue” is an excellent term to use in bringing up a family. 
It has, however, no more meaning than the fourth dimen- 
sion. Like the fourth dimension, if we attempt to define it, it 
resolves itself into a series of confused contradictions. Useful 
as the term is in daily life, it is a very confusing word for the 
psychoanalyst in discussing maladjusted personality. If he 
gets tangled up in the connotations of that term, he becomes 
an ethical philosopher and not a diagnostician. A great ma- 
jority of psychoanalysts do this very thing because they be- 
gin to weave little mental pictures about their own words 
and thus become preachers without knowing it instead of 
diagnosticians. 

Therefore, it becomes necessary for anyone thinking ob- 



Definitions and Polar Words 167 

jcct^ely about human institutions to realize the traps which 
lie beneath words. This is a familiar enough idea. What is 
not so familiar, however, is the kind of trap which lies behind 
peculiar types of words often called “polar” words. These 
have no meaning By themselves. They require an opposite 
term in order to be used at all. Let us illustrate. 

The term “up” has no meaning apart from the term 
“down.” The ferm “fast” has no meaning apart from the 
term “slow.” And in addition such pairs of terms have no 
meaning^ even when used together, except when confined to 
a very particular situation. The realization of this fact in 
physics is called the principle of relativity. “Up” and “down” 
are very useful terms to describe the movement with refer- 
ence to an elevator. They are utterly useless and, indeed, lead 
us into all sorts of errors when we talk about interstellar 
spaces. The reason is that these words require a Trame of 
reference which does not work in astronomy. The idea that 
the sun went “down” and that the sky was “up” was among 
the great stumbling blocks to astronomical science for cen- 
turies. 

The observer of social institutions must face a similar dif- 
ficulty because most of our language about the organization 
and objectives of government is made up of ^uch polar terms. 
“Justice” and “injustice” are Epical. A reformer who wants 
to aholish injustice and create a world in which nothing but 
justice prevails is like a man who wants to make everything 
“up.” Such a man might feel that if he took the lowest in the 
world and carried it up to the highest point and kept on doing 
this, everything would eventually become “up.” This would 
certainly move a great many objects and create an enormous 
amount of activity. It might or might not be useful, accord- 
ing to the standards which we apply. However, it would 
never result in the abolishment of “down.” 

The battle between justice and injustice is a similar strug- 



1 68 The Foll^lore of Capitalism 

gle. It creates activity. It leads toj:hange. It also leads to civil 
wars. What we call “progress” is a consequence of this ac- 
tivity, as well as what we call “reaction.” Our enthusiasms 
are aroused by these jwords and therefore they are excellent 
tools with which to push people around. Both the Rebels and 
the Loyalists in Spain are fighting for justice. That is what en- 
ables them to kill so many people in such a consecrated way. 

Since justice is a nice word, we refuse to apply it to people 
who are struggling for things we do not like. The pacifist 
will refuse to admit that any war can be a wa r fo r justice. 
The born fighter will say that men who refuse to fight for 
justice do not really care for justice at all. Each side gets 
morale from the use of such terms and obtains the confidence 
necessary to make faces at the other side, knowing that God 
is with him. However, these polar terms are purely inspira- 
tional. They are not^uides. Each side always claims to have 
“justice” on its side. Even organized criminals fight each 
other in the interest of justice. 

All this does not, of course, mean that such words are fool- 
ish. They are, on the contrary, among the most important 
realities in the world. Take the term “efficiency,” for exam- 
ple, which is an ideal of the business world. It has no mean- 
ing whatever unless there exists something which is called 
“inefficiency.” One does not speak of a mountain as either 
efficient or inefficient. I recently engaged in a discussion with 
a newspaper editor, whose paper had a policy of taking care 
of all its old employees. This editor was very much in favor 
of an “efficient” society. He therefore wondered whether the 
policy of taking care of old employees was really “efficient.” 
What was happening in his mind was simply this. Being a 
man of kindly impulses, he wanted the people whom he 
knew to be well fed. Being engaged in a struggle for eco- 
nomic power, he liked to see his paper make^moncy. If he 
had desired to fire some of the older employees, he would 



Definitions and Polar Words 169 

have obtained the moral courage to do so by saying that news- 
paper “efficiency” demanded it. He desired to keep his old 
employees. Therefore, the word “efficient,” with its little 
men^d pictures of making profits, created a conflict. In order 
to resolve that conflict he had to invent a new term. He was 
for humanitarianism and against ^melty. Here was another 
pair of polar words which gave him support because it put 
him on the side of the nice word. His competitor, who was 
firing his employees when they got old, would of course have 
been troubled by this new set of polar words. He would not 
want to be called cruel. He would like to be considered hu- 
manitarian. ThereTore, in order to resolve this conflict, he 
would proceed to prove that in the long run tei^orary 
cruelty led to humanitarianism. This is a complicated idea 
and therefore it takes a great many economic books to prove 
it. The idea that humanitarianism is better than efficiency is 
an inspirational idea and can be proved by a sermon. How- 
ever, Trf^uires a number of learned books to prove that 
present cruelty results in long-run humanitarianism. Eco- 
nomic theory is always equal to such a task. The humani- 
tarian is shown to be an advocate of “paternalism’* and 
against “rugged individualism.” 

These arguments never get anywhere in persuading the 
other side. However, they perform a real function in bolster- 
ing up the morale of the side on which they are used. The 
trick is to find a pair of pqbr words, in which the nice word 
justifies your own poskion and the bad word is applied to 
the other fellow. 

Thus Tceeping on old employees is not “efficiency.” An- 
swer: But it is humanitarian, which is the only proper ob- 
jective of efficiency. Apparent efficiency which leads to in- 
humanitarian results is really “inefficiency.” Reply: But 
humanitarianism which destroys rugged individualism is 
in reality paternalism, which in the long run leads to more 



170 The Folklore of Capitalism 

suffering than it cures and hence is inhumanitarian. Rebut- 
ter: But rugged individualism which destroys the morale of 
the individual by depriving him of security in the interests 
of selfish profits in the long run is in its essence Fascism. Sur- 
rebutter: Now the cat is out of the bag. You are attacking 
the profit motive and that leads to Communism. 

This sort of thing can be kept up all night. It doesn’t get 
anywhere and it doesn’t mean anything. However, it makes 
both sides feel that God is with them. It is a form of prayer. 

If you are really interested in which newspaper will suc- 
ceed, the one that fires or the one that keeps its employees, 
look them over from the point of view of habits, discipline, 
leadership, and so on. Then make your guess. What is true 
of the smaller organization is also true of great governmental 
organizations. 

The words “budget balancing” and “social cost” contain all 
sorts of hidden polar terms. They are completely meaning- 
less except as moving forces. “Social cost” is a broader term 
than “budget balancing.” The term “cost of government” is 
used to prevent the government from entering into the dis- 
tribution of goods. Private industry is supposed to “cost” no 
one anything, unless it is engaged in some activity of which 
people disapprove. It was usual once to hear arguments about 
the awful social costs of the tobacco industry. Now it is re- 
garded as one of the great helps along the road to recovery. 
The terms “cost” and “economy” are much like the terms 
“eflSciency” and “inefficiency.” From the point of view of one 
who regards big automobiles in themselves as an unmixed 
blessing, the automobile industry is one of the most efficient 
in the world. 

Suppose, however, we apply to the automobile industry the 
standards of efficiency and inefficiency of one interested in 
the cheapest, safest, and most effective transportation. From 
this Doint of view, no more inefficient transportation could 



Definitions and Polar Words 171 

be imagined than the hauling of persons around in cars with 
hundreds of times more power and space than are needed. 
The building of expensive roads, the enlargement of streets, 
the hiring of additional traffic officers, the waste of labor in 
constructing these huge machines, the loss of forty thousand 
lives a year, a million accidents, and so on, are different ele- 
ments of cost to society. Any form of amusement can be 
proved to entail great social cost in the same way. The cost 
of crime is also a favorite illustration. It is supposed to cost 
more than the automobile industry, although the toll in lives 
and property is actually infinitesimal in comparison. There- 
fore, we should suppress the automobile industry as well as 
the criminal classes. 

Obviously this does not make sense. The automobile in- 
dustry creates a great deal of activity. Men live and enjoy 
themselves by activity. There may be some other activity 
which you prefer, in which case you can talk about it in 
terms of your preferences. However, the term “social cost” 
is meaningless in diagnosis. It is only useful in preaching. 

Budget balancing is the same kind of polar term. Govern- 
mental spending creates a great deal of activity. It builds 
concrete things such as houses, which the economist calls 
“wealth.” The country is not poorer for each additional house 
which is built. Yet it is thought to be poorer in terms of 
budget balancing. The deficit financing of Germany created 
untold wealth in that country. Nations all over the world 
contributed goods, built apartment houses, roads, and parks 
for Germany. Germany emerged from the so-called inflation 
which followed its governmental deficit a much richer na- 
tion in every material respect. The nations which sent the 
goods over to Germany had less goods than before they sent 
them. Germany had more. Yet the use of these polar terms 
made people believe that Germany was “poorer” as the result 
of the “inflation.” The reason why they felt that Germany 



172 The Folklore of Capitalism 

was poorer is that “budget balancing*’ is the nice term and 
“governmental deficit” is the bad term of these two polar 
words. Therefore, if the bad term can be applied to German 
deficit financing, Germany must be worse oflE than it was 
before. 

Failure to balance the German budget is also supposed to 
be one of the causes contributing to the intolerant rule of 
Hitler and the reason why the respectable people in Ger- 
many are crushed. Actually, if one escapes from these polar 
terms, one may see that the little pieces of paper which the 
German middle class possessed at the end of the War were 
claims on organizations which had lost their morale. Such 
organizations had been conquered by the War. They did not 
have the vitality to survive because the people involved could 
not think in organizational terms and thus caused Germany 
to flounder among the welter of principles which led to in- 
action instead of action. These organizations therefore dis- 
appeared as an inefficiently managed political machine dis- 
appears, and the negotiable paper representing claims on 
them vanished with them. Political machines do not rise or 
fall because they balance their budget. Nor does any other 
form of organization. One of the reasons for the great 
strength of Hitler and Mussolini is the fact that they paid no 
attention to balancing the budget. They put people to work. 
They formed a cohesive organization. The writer is not de- 
fending either one of these two intolerant rulers. He is only 
pointing out the source of their strength. Having put people 
to work, created loyalties and morale, they became powerful 
in spite of all the theoretical guesses of observers caught in 
these polar terms. 

Budget balancing, being a polar term, can only be used for 
purposes of inspirational leadership or for counsels of de- 
feat. It can do just as much harm or just as much good as 
enthusiasms over virtue and vice, or efficiency and ineffi- 



Definitions and Polar Words 173 

ciency. It all depends upon the situation in which it is used. 
Of course, books must be kept by every organization. How- 
ever, it is the objectives which are important; the bookkeep- 
ing is only a sort of creed. Budget balancing was a marvel- 
ously effective creed for our great industrial organizations 
prior to the depression. S. W. Straus and Company grew to 
be one of the most powerful financial organizations in the 
country by proving it had assets in excess of its liabilities. The 
morale and force of the organization after its structure col- 
lapsed were such that it was able to turn around and make 
great sums of money out of “reorganization*’ of its proper- 
ties. This was another use of the slogan “budget balancing.” 
Straus and Company proceeded to convince people that it 
was the only company which could “balance the budget” of 
the bankrupt industrial properties on which it had sold 
securities. 

Budget balancing can be used as well to prevent the sale 
of bonds as to further it. Opponents of the Straus organiza- 
tion pointed out that “the budget is not really balanced.” 
Between two organizations using the same slogan, one on 
the attack and one on the defense, the success must be pre- 
dicted in terms of a guess as to the vitality of the institution. 
The same is true of governmental budget balancing. When 
the Government balances the budget, it will only mean that 
the people have accepted the role which it has taken among 
the organized activities of the country. That acceptance will 
be indicated by the general belief that the respectable end of 
the magnetic needle represented by the two polar terms will 
point at the Government instead of away from it. 

In other words, in a struggle between two competing 
organizations, the one which wins and obtains control “bal- 
ances its budget” in any atmosphere where public acceptance 
of the place of the organization must be expressed in fiscal 
terms. The phrase, however, simply means that the organiza- 



174 The Folklore of Capitalism 

tion has won an accepted place. The moving-picture industry 
did not succeed because it was thrifty and always balanced 
its budget. After it had grown, and after the period of dis- 
order and anarchy which had been an incident to that 
growth had passed, people thought it was a permanent part 
of our industrial feudalism. Therefore, they had faith that 
the “assets” of the organization were sufficient to meet its 
“debts.” Since the great organizations had won their place, 
they were automatically endowed with all the virtues of the 
American Businessman, who balanced his budget and did 
not “spend” his “assets.” The Government is not allowed to 
have “assets” today, because its place in organized distribu- 
tion of goods is not yet recognized. Hence it cannot “balance 
its budget” until (i) it withdraws from these activities, or 
(2) such activities are accepted as part of its function. The 
future part that government must play will not be deter- 
mined on principles of individual thrift. 

We are not attacking the use of polar words on the public 
stage for purposes of creating morale or enthusiasm, because 
we cannot conceive what the human race would be like if it 
did not react to them. However, we are pointing out that 
from the point of view of the diagnostician these terms con- 
tain traps which ruin his judgment. They must be used in 
public, but he should not believe in them. It may be accepted 
as a fact that men will continue to fight for virtue and against 
vice, to struggle for justice and against injustice. This applies 
to the writer as well as to everyone else. That fact should be 
recognized in making a diagnosis. 

Sometimes men are found without moral illusion who are 
able to create great organizations through the sheer use of 
power. However, this lack of illusion is itself an appearance, 
not a reality, because when all other ideals have gone by the 
board, power itself becomes the greatest of illusions. It be- 
comes a polar term and its opposite is impotence. It is too 



Definitions and Polar Words 175 

crude a term and too far away from moral conceptions to last 
long. Men are incurable moralists and therefore organiza- 
tions which do not develop such things as constitutions and 
rules of law and moral inhibitions of a more poetfc nature 
do not last long. Pretty soon someone comes along and re- 
minds the man in “power” that he is really a “slave” to that 
“power.” This mixes him up so much that he hires a priest- 
hood to solve his difficulties and thus law and economics, 
crushed to earth for a while, begin to rise again. 

Polar words are used as concrete realities in mental di- 
lemmas where an ideal and a practical need or impulse con- 
flict. Where no such conflict is felt polar terms are confined 
to a more practical frame of reference. Ordinarily, men play 
games without being spiritually troubled as to whether they 
have an efficient or a moral way of amusing themselves, or 
whether their amusements do “good” to humanity instead 
of “bad.” Puritanical people who believe that amusement is 
some sort of sin, however, feel a conflict here and develop a 
philosophy about which games are efficient and which are 
inefficient. Thus puritanism has created a lot of literature 
even in the field of sport. For Instance, It was felt necessary to 
justify football in colleges as something that builds character, 
since colleges are supposed to be serious places devoted to 
that aim. The football enthusiast, however, doesn’t really 
worry very much about the characters of the players. He 
needs the argument only when his favorite sport is attacked. 

Once men are caught in these polar terms, they become 
reformers and sometimes do very queer things indeed. The 
reform of legal procedure offers a beautiful example of a 
struggle between these polar terms. The trial of a lawsuit Is 
actually a game like football in which a great many emotions 
are released and a large number of contradictory ideals are 
celebrated at the same time. The trial of a bootlegger during 
prohibition illustrated freedom of the individual and the 



176 The Folklore of Capitalism 

moral beauty of law enforcement at the same time. It was 
also a lot of fun for the trial lawyers who, if they were effi- 
cient, looked at the thing purely as a game. People who did 
not take it as a game, however, felt they had to become pro- 
cedural reformers. They said: “This sporting theory of jus- 
tice is uncivilized.” They decided that the purpose of a trial 
was really an investigation of fact and therefore attempted to 
make the procedure live up to that ideal. 

A trial cannot be a sensible way of investigating facts be- 
cause the process consists in having two partisans indulge in 
mutual exaggerations on their own behalf with the idea that 
the judge will find the truth in the middle. The detective does 
not adopt that process. Neither does the scientist refuse to 
look through the microscope himself in order to listen to a 
debate between opposing theories about what the atom is 
made of. Procedural reformers, however, based their recom- 
mendations upon the idea that a trial actually was an inves- 
tigation. They therefore tried to make an investigation out of 
what really was a combat. The New York Code, under the 
impact of this sort of procedural reform, became the most 
complicated legal ritual which the world has ever seen. It is 
becoming less complicated today only because people are be- 
coming less mystical and more practical about the term 
“trial.’* We are not trying to make the trial process do things 
of which it is incapable. 

We may make our illustration of procedural reform clearer 
by transferring it to another activity. Suppose that a football 
reformer observed the obvious fact that the object of the game 
is to make touchdowns. This would lead immediately to the 
important discovery that if the two teams would only co- 
operate hundreds of touchdowns could be made in a game, 
while only one or two are made when each opposes the other. 
If such a reform were adopted and the game were to con- 
tinue, it would have to develop a very complicated method 



Definitions and Polar Words 177 

indeed in which the teams pretended they were cooperating 
and at the same time kept on playing. 

Or take another example. A reformer wishing to make 
bridge more ‘'efficient” or more “honest” would instantly 
observe that the object of bidding was to enable a player to 
tell his partner what he had in his hand. Therefore, he would 
make it the rule that instead of the inefficient and dishonest 
subterfuges now employed, each partner should go over and 
whisper to his partner what cards he held. In law this is 
called “getting rid of technicalities.” 

A good deal of procedural reform is based on this idea. It 
is neither a good nor a bad thing from an objective point of 
view. It keeps a lot of people busy. So long as the trial must 
represent all conflicting ideals which are current, it has to 
represent the ideal of “efficiency” as well. This keeps a large 
number of both lawyers and reformers occupied. If these 
same people were set by the Government to painting pictures 
or producing books, everyone would accuse the Government 
of extravagance and claim they were boondoggling. The in- 
tellectual atmosphere of the time, however, permits them to 
make a living alternately producing and abolishing “techni- 
calities” (another polar term). Thus a number of people are 
kept out of productive enterprise in times when we are un- 
able to distribute our productive capacity. The same phe- 
nomenon might be a bad thing if there was not already too 
much production, but at present it prevents the further ex- 
tension of the W.P.A. 

Of course, in order to make judgments as to whether any 
activity is a good or a bad thing, it is necessary to have stand- 
ards. For the time being we arc adopting the standard that It 
is a good thing to produce and distribute as much goods as 
the inventive and organizing genius of man makes possible. 
We will not enter into a philosophical discussion as to why 
we like that kind of society. We will only ask the reader to 



1 78 The Folklore of Capitalism 

agree with us for the time being that maximum production 
and distribution of goods are a good thing, because that 
assumption olTers a platform on which to stand to observe 
the slogans and ideals which we are discussing. Battles over 
polar terms are one way of distributing goods, because the 
combatants are usually highly paid and greatly respected for 
their learning and ideals. We realize that there is no ultimate 
answer to the argument as to whether medieval civilization 
is really better than modern civilization. Both produce heroic 
characters and there are no ultimate standards except those 
which are emotionally felt by the individual. The standard 
which the writer now adopts is that of a society which pro- 
duces and distributes goods to the maximum of its technical 
capacity. He believes that creeds and theories develop auto- 
matically from organizations. He judges the desirability of 
such creeds by the extent to which they advance his standard. 

In judging and observing creeds and philosophies, it is nec- 
essary first of all to recognize the fact that life is something 
like a drama and that a drama is not successful without a 
hero and a villain. No creed can be successful unless someone 
is violating it. We must not get caught in the notion that 
the efficient dramatist should kill the villain at the beginning 
of the first act so that he cannot cause all the suffering which 
intervenes before his final death in the third act. Human 
beings, including the writer, are moved by inspirational 
forces. If one is going to describe the impact of these forces, 
he must get outside them in order to look at them. He must 
not make the mistake of thinking that he can abolish them. 
He must not think that if he himself is called on to take a 
part in the drama he does not have to follow its conventional 
form. If that form is not followed, no one will sit In the 
audience. 

In producing that drama it is necessary to have some ob- 
jective, which the producer accepts on faith. If he is able to 



Definitions and Polar Words 179 

achieve that faith and at the same time treat objectively the 
faith of others, he may become a powerful factor either in 
diagnosing or in moving human beings and human institu- 
tions. Whether he is an influence for good or evil depends 
entirely upon the values selected. Nevertheless, in a society 
where scrupulous people refuse to adopt this technique, the 
unscrupulous will become the most powerful. Political ma- 
chines will run the government instead of college professors, 
because the members of the first are able to look at facts as 
they are and the second are interested in principles as ends in 
themselves. They are hopelessly caught in the tangle of polar 
words. They create much motion, but no direction. 

And how may we escape from the confusing effect of such 
polar terms? The handiest platform today is that suggested 
in the last chapter; i.e., to assume that human organizations 
have a sort of subconscious mind. The subconscious mind 
may thus become useful, like the fourth dimension in mathe- 
matics. At least it will be useful until you attempt to define it 
in words. Then this term also will become a welter of con- 
tradictions, just as the old terms were, because “subconscious’* 
mind is also a polar term. “Consciousness” and “subcon- 
sciousness” have their own limited application, but one must 
not try to make universal truths or substances out of them. 

And this leads to the second trap which lies in wait for the 
diagnostician of modern society. That trap consists in a faith 
in definition. The only purpose of logical definition is to 
resolve mental conflicts. It is not useful as a descriptive tool 
because it is ordinarily used as a method of finding out what 
“things” really are, instead of as a method of conveying 
thought by the quickest available means. The law, which is 
above all a method of reconciling conflicting ideals, becomes 
so heavy with definitions that it is almost unintelligible. 
Therefore, it becomes a convenient illustration of the traps 
in which learned people arc particularly liable to be caught 



1 8o The Folklore of Capitalism 

Definition is ordinarily supposed to produce clarity in 
thinking. It is not generally recognized that the more we de- 
fine our terms the less descriptive they become and the more 
difficulty we have in using them. The reason for this paradox 
is that we never attempt to define words which obtain a 
proper emotional response from our listeners. Logical defini- 
tion enters when we are using words which we are sure 
“ought” to mean something, but none of us can put our fin- 
ger on just what that meaning is. In such situations priestly- 
minded men believe that definition will make the meaning 
clearer. Most of this kind of definition occurs in the use of the 
polar words which we have just been describing. 

We may illustrate by a homely example. There is no con- 
flict in a farmer’s mind about the meaning of the words 
“horse” and “duck.” The one is not used as a polar term to 
the other. If you tell a farmer to bring you a horse, he never 
comes out of the barn leading a duck. 

Suppose that the farmer attempted to define the difference. 
If he took the task at all seriously, he would find millions of 
differences. His definition would become so involved that 
he could no longer talk about the animals intelligibly. He 
would probably end up by thinking that horses were really 
ducks and vice versa, because this is an ordinary effect of 
the close concentration on particular pairs of terms; they 
tend to merge, and the distinctions between the two grow 
less and less sharp. 

Of course, you say, the farmer would never attempt such a 
thing. This is true in the ordinary situation. But suppose that 
a conflict arose between an abstraction and a need which re- 
quired the use of the words in pairs. We can easily imagine 
such a hypothetical situation. 

Suppose, for example, we had a statute that taxed horses 
at ten dollars a head and ducks at ten cents. This docs not 
create any conflict, because it seems to be a fair enough 



Definitions and Polar Words i8i 

classification according to the prevailing folklore of taxa- 
tion. However, suppose, in addition, that due to the auto- 
mobile, or some other cause, horses became completely 
worthless and ducks became very valuable. Suppose that the 
original statute had been passed by ancestors of such great 
respectability that it would be tearing down the Constitu- 
tion to repeal it and use new words. Obviously, if we want 
to collect revenue in such a situation, we must begin to define 
the real essence of the difference between a horse and a duck. 
We set our legal scholars to work. They discover that there 
are all sorts of immaterial differences apparent to the super- 
ficial eye. The mind of the scholar, however, is able to pene- 
trate to the real essence of the distinction, which is value. 
The horse is the more valuable animal. It is clear that the 
fathers thought that this was the difference, because Thomas 
Jefferson once remarked to his wife that his horses were 
worth much more than his ducks. Differences between 
feathers and hair were never mentioned by any of the found- 
ers. Therefore, it is apparent that the webfooted animals are 
really horses, and the creatures with hoofs arc really ducks. 
(Such observations are called “research.”) 

This works all right so far as the taxing situation is con- 
cerned. Revenue begins to flow in again. However, scholarly 
definitions are supposed to go through the surface and to the 
core of things. (Ordinary men feel a conflict, because deep 
down in their hearts they feel that there is something wrong 
somewhere. This conflict makes them celebrate the truth of 
the definition by ceremony. If the conflict is a minor one, a 
procession once a year in which ducks are led around with 
halters and equipped with little saddles will be sufficient. A 
supreme court is also helpful in such situations. However, if 
the conflict is sufficiently keen, we shall find farmers all over 
the country forced to feed ducks on baled hay. Ducks will not 
die because of this, however. They will actually be kept alive 



1 82 The Foll^lore of Capitalism 

by low-class politicians sneaking Into the barn at night and 
giving them the proper food. (Thus a great organization of 
bootleggers gave us our liquor only a few years ago.) If this 
situation is finally accepted as inevitable, scholars will be 
called in to prove that the particular food which is being 
fed to the ducks is actually baled hay, even though to a super- 
ficial observer it looks like something else. This definition 
will mix men up along some other lines and the literature 
will continue to pile up so long as the conflict exists. When 
the conflict disappears, the need of definition will go with it. 

The illustration sounds absurd, but the writer has tried 
many cases involving exactly that type of situation. A plaster 
company was scraping gypsum from the surface of the 
ground. If it was a mine, it paid one tax; if a manufacturing 
company, it paid another. Expert witnesses were called who 
almost came to blows, such was their disgust at the stupidity 
of those who could not sec that the process was essentially 
mining, or manufacturing. A great record was built up to be 
reviewed by the State Supreme Court on this important 
question of “fact.” 

A typical piece of theology of this type is the transforma- 
tion of the due process clause in the fifth amendment from a 
direction regarding criminal trials to a prohibition against 
the regulation of great corporations. The word “property” 
in a like manner has changed from something which was 
tangible to the right of a great organization to be free from 
governmental interference. Such changes appear to have 
something wrong about them, because the older response to 
the sound of the word “property” is still instinctively felt. A 
spiritual conflict is created which requires a great deal of 
literature or ceremony to resolve. 

How may the observer of social institutions avoid such 
traps? The answer is that in writing about social institutions, 
he should never define anything. He should try to choose 



Definitions and Polar Words 183 

words and illustrations which will arouse the proper mental 
associations with his readers. If he doesn’t succeed with these, 
he should try others. If he ever is led into an attempt at 
definition, he is lost. The writer learned that lesson in the 
course of a seminar which he attempted to give at the Yale 
Law School with a great foreign anthropologist. The notion 
which started this endeavor was that the anthropological 
point of view would be helpful in talking about the law. We 
began the seminar on the assumption that the fundamental 
link between the anthropologist and the lawyer was that 
they were both concerned with social institutions. Then as a 
next step we started to define “institution” so that our discus- 
sion would be clear. As in all such endeavors, the word 
“institution” broadened until it meant everything in the 
world. Someone even suggested that Niagara Falls was an 
institution, because it had continuity and movement and 
coherence and whatnot. Then we had to subdivide so that 
this definition which had grown to include everything could 
be applied to activities narrow enough to talk about. When 
we ended we had a definition so involved that it could not be 
used for any purpose whatever. 

For the purpose of making a ceremony which dramatizes 
two or more contradictory ideas at the same time, the process 
of definition is most useful. It conceals inconsistencies. It is 
peculiarly adapted to the law, where ceremony Is more im- 
portant than action. It is not adapted to the administrative 
process. Thus we find administrative tribunals reverting to 
practical language wherever their activity is recognized as a 
legitimate one and accepted without question. A workman’s 
compensation board talks and acts in determining awards in 
fairly plain English, without elaborate definition. However, 
when the theological question arises, as to the “jurisdiction” 
of the compensation board, we find ourselves in the area of 
conflicting moral ideals. We want to give compensation 



184 T he Folklore of Capitalism 

only to those injured ‘'in the scope of their employment.” 
Suppose that a workman stays over time. Is he within the 
scope of his employment Yes, replies the New York Court 
of Appeals, because otherwise workmen would become clock 
watchers. The treatment of such subjects requires theological 
definition. 

The process of creating abstract realities out of polar terms 
and surrounding them with scholarly definition has always 
accompanied the decline of great religions. It is not surpris- 
ing therefore that in a time when private property and 
rugged individualism are more myths than realities we 
should find law and economics more theological than ever 
before in our history. 

This chapter is a digression, though a necessary one. We do 
not claim that we can avoid the use of polar terms in the rest 
of this book, since it is impossible to write without some 
standard and since standards can never be formulated except 
in polar terms. The only safety which an objective observer 
can have is the realization of the kind of traps which such 
very necessary words contain if used outside of a narrow 
frame of reference. 



CHAPTER VIII 


The Personification ofi Corporation 

In which it is explained how great organizations can be treated 
as individuals, and the curious ceremonies which attend this way 
of thii^ing. 

O NE of the essentid and central notions which give 
our industrial feudalism logical symmetry is the 
personification of great industrial enterprise. The 
ideal that a great corporation is endoweefwith tfie rights and 
prerogatives of a free individual is as essential to the accept- 
ance of corporate rule in temporal affairs as was the ideal of 
the divine right of kings in an earlier day. Its exemplifica- 
tion, as in the case of all vital ideals, has been accomplished 
by ceremony. Since it has been a central ideal in our indus- 
trial government, our judicial institutions have been par- 
ticularly concerned with its celebration. Courts, under the 
mantle of the Constitution, have made a living thing out of 
this fiction. Men have come to believe that their own future 
liberties and dignity are tied up in the freedom of great indus- 
trial organizations from restraint, in much the same way that 
they thought their salvation in the future was dependent on 
their reverence and support of great ecclesiastical organiza- 
tions in the Middle Ages. This ideal explains so many of our 
social Iwbits, rituals, and instimtions that it is necessary to 
examine it in some detail. 

The origin of this way of thinking about organization is 
the result of a pionecr.xbrilization in which the prevailing 
ideal was that of the freedom and digni^ of the individual 
engaged in the accumulation of wealth. The independence 
of the free man from central authority was the ^gan for 



i86 


The Folklore of Capitalism 

which men fougli^and died. This free man was a trader, 
who got ahead by accumulating^ money. There was some- 
thing very sacred in the nineteenth-century conception of 
this a^vity. In the ’seventies the most popular text in eco- 
nomics was one originally written by a clergyman, Bishop 
Francis Wayland, and revised in 1878 by A. L. Chapin, 
President of the Congregational College at Beloit. Joseph 
Dorfman, in his brilliant book on Thorstein Veblen and His 
America,^ summarizes this philosophy of the holy character 
of the trader’s function as follows: 

i) “God has made man a creature of desires* and has estab- 
lished the material universe “with qualities and powers . . . for 
the gratification of those desires!' Desire is the stimulus to pro- 
duedon and inv^ention. 2) To satisfy desires, to obtain pleasures, 
man must by “irksome” labour force ** nature to yield her hidden 
resources!* 3)7 he exertion of labour establishes a right of PROP- 
ERTY in the fruits oi labour, and the “idea of exclusive posses- 
sion^isji necessary consequence.” Originally the object belongs to 
the producer “by an intuitive conception of right, and the act of 
appropriation is as ins tin ctive as the act of breathing.” The right 

property r^ conceived as “a law ofnatural justice,” as 
Bowen of Harvard put it, because “the produce r^wburd not put 
forth his force and ingenuity if others deprived him of their 
fruits.” Thus is established 4) “The Right of EXCHANGE!* 

Here is the beginning of the religion of the essentkl dig- 
nity of an individi^l’s accumulating wealth by trading which 
later became the mystical^ilosophy that put the corporate 
organizjition ahead of the governmental organization in 
prestige and power, by identifying it with the individual. 
Our fathers breathed this atmosphere in every day of their 
schooling. For a pointed summary of their attitude toward 
distribution of goods by so-called governmental organiza- 
tions, we quote again from Mr, Dorf man’s book;^ 

ip. 23. 2 pp. 24-25. 



The Personification of Corporation 187 

Since so cia lism is the “utter negatlpii’^. of the rightjof private 
property, “man is no more adapted to it than the barn fowl is to 
live in the water.” Philanthropy or any other aid of the poor is 
a violation of the same laws of God and property. All attempts 
to “relieve the natural penalties of indolence and improvidence” 
bring about “unexpected and severe evil.” The doctrine that the 
governm ent should provide for the unemployed “is the^-most 
subversjye o£ alLspcial order.” Even the claim of Ruskin that “all 
la bou rs of like amounts should receive the same reward,” means 
the suppression of “commercial law,” which is “God’s method.” 
If Jabour and capital are free, as they are in the “order of nature 
undisturbed” under “the law of competition,” then “the flow of 
each . . . toward an equilibrium, is as natural as that of waters 
of the ocean under gravitation.” In reality the labourer has no 
complaint against the competitive system. As Perry put it, em- 
ployer and employee “come together of necessity into a relation 
of mutual dependence, which God has ordained, and which, 
though man may temporarily disturb it, he can nevejr jDver- 
throw.”» 

Here was the philosophy of the men who came later to 
dominate our large industrial organizations and also to work 
for them. There was nothing in that philosophy which justi- 
fied far-flung industrial empires. Indeed, the great organiza- 
tion in which most men were employees, and a few at the 
top were dictators, was a contradiction of that philosophy. 
The great organization carne^ in as a result of mechanical 
tec^iques whic h sp ecialized the work of pmduction so 
that men could not operate by themselves. Nothing could 
stop the progress of such organization, and therefore in order 
to tolerate it, men had to^pretend that corporations were in- 
dividuals. When faceJwith the fact that they were not indi- 
viduals, they did not seek to control, but denounced and 
tried to break them up into smaller organizations. Those 

® The quotations in the above excerpts are selected from texts and arti' 
cles current at Carleton College when Veblen was a student. 



1 88 The FolJ{lore of Capitalism 

who did not choose to dissent, however, sought refuge in 
transferring the symbolism of the individual to the great in- 
dustrial armies in which they were soldiers. 

It is a familiar social phenomenon to see the symbols of 
the habits of pioneer times transferred as a social philosophy 
to later institutions to prove that we still are following the 
examples of our fathers. 

The trick of such social philosophies is to justify the hard 
lot of those who never attain any particular rank in society. 
Rugged individualism is a peculiarly American creed. Ger- 
many, with a strong military tradition, justifies an industrial 
civilization with a philosophy which has the flavor of mili- 
tary discipline, since the soldier has always been respected 
above die trader in Germany. Compare the mysticism of 
private property which we have quoted above with a recent 
Berlin dispatch, which reads as follows: 

rhe discharge of the old contingent [from the German govern- 
ment labor battalion] was accompanied by a morning festival 
broadcast by all German radio stations, especially to the 1,300 
labor-service camps. The festival was held under the motto, 
“Blessed be that which makes hard.” This motto was repeated by 
the labor-service chorus, which chanted: “Wc thank the Fiihrer 
for the hard life which he bestowed upon us in the labor service.” 
From a Berlin dispatch to the New Yor\ Times (New Republic, 
June 2, 1937). 

The essential military character of this prayer is as marked 
as the deification of the trader in the prayers recited by 
AmericaiT organizations. It is of such stuff that the vkal and 
living economic philosophy of a people is made. 

It was this idendfication of great organizations with the 
dignities, freedom, and general cthics~oFthc individual trader 
which relievcd^our federation of industrial empires from the 
hampering restrictions of theology which always prevent 



T he Personification of Corporation 1 89 

experiment. Men cheerfully accept the fact that some indi- 
viduals are good and others bad. Therefore, since great in- 
dustrial organizations were regarded as individuals, it was 
not expected that all of them would be good. Corporations 
could therefore violate any of the established taboos without 
creating any alarm about the “system’' itself. Since individ- 
uals are supposed to do better if let alone, this symbolism 
freed industrial enterprise from regulation in the interest of 
furthering any current morality. The religion, 

based on a collection of a soci^y composed of competing 
individuals, was transferred automatically to industrial or- 
ganizations with nationwide power and dictatorial forms 
of government. 

This mythology gave the Government at Washington only 
a minor part to play in social pjrganization. It created the 
illusion that we were living under a pioneer economy com- 
posed of self-sufficient men who were trading with each 
other. In that atmosphere the notion of Thomas Jeffersoxjj 
that the best government was the one which interfered the 
least with individual activity, hampered any control o£. our 
industrial government by our political government. We were 
slower, therefore, in adopting the measures of control of in- 
dustrial organization than a country like England. The Gov- 
ernment at Washington gradually changed into what was 
essentially a spiritual government whose every action was 
designed to reconcile the conflict between myth and reality 
which men felt when a creed of individualism was applied 
to a highly organized industrial world. Government in 
Washington was supposed to act so as to instil “confidence” 
in great business organizations. The Supreme Court of the 
United States, because it could express better than any other 
institution the myth of the corporate personality, was able 
to hamper Federal powers to an extent which foreigners, 
not realizing the emotional po\yer of the rnyth, could not 



190 The Folklore of Capitalism 

understand. This court invented most o£ the ceremonies 
which kept the myth alive and preached about them in a 
most dramatic setting. It dressed huge corporations in the 
clothes of simple farmers and merchants and thus mad^ at- 
tempts to regulate them appear as attacks on libertj^ j^^ the 
Iwme. So long as men instinctively thought of these great 
organizations as individuals, the emotional analogies of 
home and freedom and all the other trappings of “rugged 
individualism” became their most potent protection. 

The extent to which freedom of restraint of great indus- 
trial government was dramatized as individual freedom is 
illustrated by the fact that it was possible for John W. Davis, 
as late as 1936, to rouse his audience to a high pitch of in- 
dignation against an act regulating holding companies by 
speaking as follows: 

There is something in this act that arouses me far beyond the 
scope and tenor of the act itself. In one respect it is unique in the 
history of our legislation; in one respect it constitutes the gravest 
threat to the lil^rties of American citizens that has emanated 
from the halls of Congress in my lifetime. That is strong lan- 
guage. But I mean to make it so. {New Yor\ Times, August 26, 
1936.) 

It was the persoaificatioil.jof . the corporation as an indi- 
vidual which gave moving force to such remarks, which 
otherwise would seem almost incredible. Anyone who actu- 
ally struggled for the liberties of actual individuals, rather 
than idealized ones, was greeted with the hostility that greets 
anyone who tears the veil away from a great sym^l^ Thus 
Felix Frankfurter of Harvard, fighting for Mooney and for 
Sacco and Vanzetti, was a distinct handicap on the endow- 
ment drive of that great institution. Roger Baldwin, head of 
the Civil Liberties Union, served a term in jail and was al- 
ways regarded as a suspicious character. This is not surpris- 



The Personification of Corporation 191 

mg, nor should the observer become indignant about it. It 
is simply an illustration of how the personification ^f^he 
great corporation actually worked to monopolize completely 
the mantle of protection design^ for^ t^^^^ The 

Civil Liberties Union thus contained less respectable people 
than the American Liberty League. 

The mantle o^roteption which this attitude threw over 
corporate government is illustrated in the popular reaction 
to the sit-down strike when it was first used as a weapon 
against General Motors Corporation by John L. Lewis. So 
firmly fixed in popular imagination was the belief that Gen- 
eral Motors was.a big man who “o wneT *jhe,plant that the 
public became alarmed over possible dangers to their own 
homes because of this method of conducting a strike. Many 
sincerely felt that this insult to the sanctity of property justi- 
fied the shedding of blood and that Governor Murphy’s con- 
ciliation of the General Motors strike in 1937 was a compro- 
mise with the Devil that endangered individual freedom. If 
General Motors had been pictured as a governing organiza- 
tion, exercising the governing power over thousands of 
people, the right of these people to security in their jobs might 
have been recognized as on somewhat the same level as the 
rights of security holders in the corporation. Th^ conceptjof 
the ‘‘ownership’^ ofjGeneral Motors prevented that^^de 
from developing. The sit-down strike, though much more 
orderly than the strikes in past depressions had been, actually 
gave the impression of greater disorder and anarchy be- 
cause it could be dramatized as the taking away of property I 
from an individual. This kind of dramatization was, of 
course, more keenly felt by the respectable people than by the 
masses, with whom the personification ' 

an individual was disappearing. For example, a temperate 
and impartial analysis of the principles of labor law by Dean 
Landis of the Harvard Law School in 1937 during the initial 



192 T he Volhlore of Capitalism 

activities of the C.I.O. provoked outspoken hostility among 
the alumni of that great Jjastitution. 

This SnUre volume could be filled with the queer effects 
of the personification of industrial enterprises in mixing cere- 
mony with the production and distribution of goods. Control 
oF greaU:^anizations dr^ed out of the hands of those who 
knew the techniques of the business and into the hands of 
bankers. Stock manipulation became more important in 
control than efficiency of production. Organizations com- 
peted with each other in building magnificent structures for 
pure show and in order to gain dignity and prestige in the 
company of their peers. Great law offices grew up in New 
York to supply the infinitely complicated logic needed to 
keep the separate individuality of parent and subsidiary or 
affiliate corporations apart. Theological disputes produced a 
great literature as to what the ‘‘real nature” of a corporation 
was which was assiduously studied in law schools. 

A similar complication of philosophy and dialectic at- 
tended the ceremonies of chivalry when the institutions 
which this mythology once described so vividly were dis- 
appearing. Such things are familiar in times qLsocial ch^ 

When the actual world is not at variance with men’s be- 
lief, it is unnecessary to write or think much about it. People 
are not troubled by doubt in such times; therefore doctrine 
is not needed. When ^mbols or beliefs have no relation to 
what men see before them, regularity of doctrine becomes 
of paramount importance. Since observations in such a situa- 
tion create only paralyzing doubt, men mus^drown their 
observations in doctrine and philosophy. Therefore, cere- 
monies grow in number and mystical literature increases by 
leaps and bounds, becoming more and more abstract as It 
grows. That this has happened to economic theory is obvious. 
The reasons why it has happened lie in the fact that where 
the fiscal religion becomes completely jmdescriptive of what 



T he Personification of Corporation 193 

is goin g on, ceremony is the only way of giving force to the 
creed. 

This symbolism made practical legislation legalistic and 
complicated so that it would not contradict fixed beliefs. For 
example, the Social Security Act was drawn to resemble an 
insurance corporation, because insurance corporations were 
supposed to be very pious and respectable individuals indeed. 
The Government put money in a huge reserve. This reserve 
had to be invested in its own bonds and therefore had no 
meaning whatever, except to make social security legislation 
look like an old-line insurance company. In other^enterprises 
the Government found that by adoptingjhe device of a gov- 
ernmen^corppration if gave it5 activities a little o^he free- 
dom wjiichjvyas enjoyed by private corporations and escaped 
the rules and principles which hampered action when it was 
doneT)y a government department instead of a government 
corpe^tion. In other words, it gave the Government some 
of the robes of the individual. 

There seemed no jimit to the size of these industrial em- 
pires masquerading as individuals. Laws against monopoly 
and restraint of trade were easily eyaded In the fairyland 
where men pretended that organizations were men whe 
owned^foperty. Nothing in the Middle Ages compares for 
sheer fantasy with the holding company, or with modern 
security manipulation by which control of large organiza- 
tions may be obtained without investment risk. Equally 
fantastic was the notion that ^ corporation had the ri ghts ol 
a eifizen of the st^e which incorporated it. This permitted 
the use of the sacred doctrine of sta^ rights to hamp^rjegu- 
lation of industrial^onpires which had no connection with 
any particular state. 

Organizations which exercise governing powers of a per- 
manent character do nq ^ ma intain their power hy force 
Force is ^tirely too exhausting. They do it by identifying 



194 The Fol \lore of Capitalism 

themselves with the faiths and loyalties of the people. There- 
fore, the picture which people see of a society is always in 
terms of these faiths and loyalties. They do not examine any- 
thing, however obvious, which contradicts thx>sa-i^^ 
educated men who opposed the holding-company bill could 
actually describe the structure of any of our great holding 
companies, but this did not interfere with their belief that an 
attack on that form of corporate structure was an attack on 
individualism. 

In the brief filed by the Government in the Electric Bond 
and Share case* a typical holding company is described as 
follows: 

In the United States the Bond and Share system embraces utility 
properties in no fewer than 32 states, from Pennsylvania to Ore- 
gon and from Minnesota to Florida. The system serves 2,487,500 
electric customers, 10 percent of the total electric customers of the 
United States, deriving therefrom in a year $214,600,000 in reve- 
nues. This exceeds the annual income of any state in the United 
States, with the exception of New York {Financial Statistics of 
State and Local Governments [1932], p. 10, compiled by the 
United States Department of Commerce, Bureau of Statistics). 
In 1934, 85 billion kwh of electric energy were generated in the 
United States. Of this amount the Bond and Share system gen- 
erated 1 1.8 billion kwh, or approximately 14 percent, and han- 
dled i/^Vi billion kwh, or 17 percent. The system owns 23,460 
miles of transmission lines (i.e., lines of more than 40,000 volts), 
or 30.2 percent of the total miles of transmission lines in the 
United States. 


^ Securities and Exchange Commission v. Electric Bond and Share Co., 
18 Bed. Sup. 131; brief for the Government prepared by John J. Burns, 
General Counsel, Securities and Exchange Commission; Robert H. Jackson, 
Assistant Attorney General and Special Counsel, Securities and Exchange 
Commission; John |. Abt, Special Counsel, Securities and Exchange Com- 
mission; Benjamin V. Cohen, Special Assistant to the Attorney General; 
Thomas G. Corcoran, Special Assistant to the Attorney General; and otliers. 



The Personification of Corporation 195 

These gigantic gas and electric utility enterprises over which 
the Bond and Share companies hold sway represent tremendous 
^ggrcgatipns„_of capitaL.belpn^^ investors throughout the 
\^j:ld. Of the huge investment in these enterprises, seventy-five 
to eighty percent is represented by the senior securities of operat- 
ing companies, purchased for the most part by the investing pub- 
lic. The interest of Bond and Share or its intermediate holding 
companies in these operating companies (as represented by their 
common stock holdings) usually did not exceed 25 percent of 
the total stated capitalizations of the operating companies. When 
these capitalizations reflected, as they nearly always did, ledger 
values substantially in excess of the cash paid into the operating 
companies or the original cost of the properties to their predeces- 
sor companies, Bond and Share’s real equity in these properties 
became even smaller, and the public’s larger. Write-ups in the 
capital accounts of the operating companies, in other words, 
served as the book basis for the securities issued. . . . It is a fair 
conclusion, even though possibly not susceptible of exact proof, 
that in light of the write-up policies pursued by Bond and Share, 
the common stocks of its operating companies, which its inter- 
mediate companies hold, represent substantially less than 20 per- 
cent of their bona fide capitalization. The real owners of the 
operating properties in the Bond and Share system are not Bond 
and Share (which owns, in its intermediate holding companies, 
only a minority interest sufficient for control); nor are the real 
owners the intermediate holding companies which own substan- 
tially all of the common stock of the subsidiary companies. The 
real owners are the senior-security holders of the operating com- 
panies. It is they who have contributed substantially more than 
three-fourths of the capital. Yet they have been deprived of any 
real representation in the management of their properties, and 
for them Bond and Share has no mandate to speak. 

A holding company is distinguished from an investment com- 
pany by the control it is in a position to exercise over its sub- 
sidiaries. In the complicated field^.g£xorpprate_^^ that con- 
trol may l^e exercised in many ways, sometimes loosely and some- 



196 T he Folklore of Capitalism 

times rigidly, sometimes openly and sometimes covertly. Where 
voting stock is widely distributed, actual cirntrol. ex- 

ercised by a very small percentage of comrnpn stock, yet a farge 
minority interest may be unable to exercise control if a still larger 
interest is possessed by another organized group. It is relatively 
easy for a company charged with controlling another company 
to prove that it in fact exercises no control, but it is extremely 
difficult for an outside agency, which must draw its facts from 
unwilling witnesses, to assume the burden of proving actual con- 
trol. The use of voting trusts and of agents and nominees with 
imdisclosed principals may conceal the real source of control 

The dealings between Bond and Share and the serviced com- 
panies are conducted on an informal basis. Not only arc its rec- 
ommendations normally and usually followed, but when a re- 
quest is made by a serviced company for a particular service, that 
request as frequently as not originates in a suggestion of Bond 
and Share’s representative. So unified and harmonious has been 
the Bond and Share plan of management that the service J com- 
panies and Bond and Share in dealings with each other, employ 
the same New York law firm. And the serviced companies have 
never had occasion to employ legal representation separate from 
that offered by Bond and Share or Bond and Share’s New York 
counsel. The Bond and Share group has alwavs been one happy 
family.® 

And, finally, the personal control of the holding company 
which controls all those companies is in itself a minority 
operating without any formal violation of the competitive 
ideals which accompany a fiscal way of thinking — ^just as a 
great central organization at Rome, which was no longer 
military, operated under the f olklo re that every Roman was 
a SQldier. 

The main purpose of the fis^l symbolism in this country 
as it existed after the World War "was to preserve the inde- 

»pp. 47-48, 50 “ 5 i» 62-^4, 96-97 



T he Personification of Corporation 197 

pendence of the great organizations which controlled the 
production and distribution of goods. It supported the no- 
tions that to manage the currency and credit of great organi- 
zations led to inflation and repudiation of debts, stifled indi- 
vidual initiative, destroyed die home of the poor m5i',Turned 
his future security over to wicked politicians, compelled 
regimentation, and ended in dictatorship. In such an atmos- 
phere the Supreme Court of the United States in declaring 
unconstitutional the minimum wage law for women® em- 
phasized the idea that it interfered with the freedom of 
women, rather than the fact that it protected large orgahiza- 
tidnTfrom added expense. 

The prqpf , of these propositions could be made by either 
legal or economic learning. The arguments often appeared 
nonsensical, but it should be remembered that for the pur- 
pose of binding organizations together nothing makes as 
much sense as nonsense, and hence nonsense always wins. 
If the reader does not believe this, let him substitute for an 
impressive and moving ritual in any organization to which 
he belongs, a series of factual and practical observations. If 
he does, he will see the organization crumbling for ladl.of 
the emotional drive which epnaes only from ceremony. Tears 
and parades, not factual psychological discussion, are the 
movIngjEQ rces of the world in which wel^pen to live; and 
this is true eyeojor psychologists. 

Thus we find a great deal of literature along the general 
lines of the following, which we quote from President Hop- 
kins of Dartmouth College. President Hopkins is speaking 
of the probable effects on natip nal c haracter if men look to 
governmental organization instead oF to industrial organiza- 
tions for supportln a temporal world. 

^P^orchead v. Tipaldo, 298 U.S. 587, reversed in West Coast Hotel Co, 
V. Parrish, 300 VS. 379, after Roosevelt had proposed his famous plan to 
rejuvenate the Court. 



198 The Foll^lore of Capitalism 

Initiative, courage, hardihood, frugality, and aspiration for self- 
betterment are to be penalized, and the fruits of these are to be 
taken from those who have undergone self-sacrifice to attain them 
and bestowed upon those who have never developed the qualities 
to possess themselves of rewards. . . . The necessity for struggle, 
by which men have developed strength, and the disciplme of 
hafdsliip, Through which they have achieved greatness of mind 
and heart and soul, are to be replaced by a specious security. 


But it is the effect of the New Deal on the imagination and as- 
piration of youth that I most dread. I am desperately afraid of it 
because it teaches young men and women to unlearn the lessons 
nf Am<;rica whic h school and college have striven so carhcstly to 
teach. It encourages weakness and penalizes strength. It diffuses 
throughout the masses of our people the spiri^qf acquisitiveness 
which it condemns in groups qf_jthem. It punishes accomplish- 
ment and persecutes individuals and industrial enterprises alike 
simply on the basis of the magnitude of their achievement with- 
out regard to the social value .pf the imaginative and creative tal- 
ent which brought them in^ being. {Atlantic Monthly, October, 

i^.) 

The periodical literature of the time was full of these fore- 
bodings. Walter Lippmann led the crusade for the indi- 
vidualism of corporate enterprise, which meant that men 
shouldT not become dependent upon that kind of organiza- 
tion which admitted it had public functions to perform. 
These people did not think of the dependence of men upon 
great industrial organizations as interfering, with .individual- 
ism. If the decreasing independence of actual individuals was 
called to their attention, they insulated themselves against 
this obvious fact by pointing to a complicated literature of 
economics and law. The fact that every individual in the 
country had become absolutely dependent on great organiza- 
tions, including the student body and the professors of Dart- 



The Personification of Corporation 199 

mouth College, did not disturb President Hopkins so long 
as the organization was not called the Government, and 
therefore did not disturb the smooth process of accustomed 
ritual. 

Yet from the short quotation set out above, it is easy to see 
that President Hopkins was worried by facts which were 
making current mythology less and less tenable. Hence he 
felt called upon, in his capacity as educator, to do what he 
could about dictating the social philosophy ol the future by 
pointing out the danger of deserting the old-time religion. It 
is a phenomenon which will be found repeated over and 
over again in every era. 

As the symbolism got farther and farther from reality, it 
required more and more ceremony to keep JjjLip. The busi- 
ness corporation built more elaborate cathedrals and en- 
dowed greater colleges to keep its theology moving along 
the right lines. This, of course, was an unconscious process, 
just as the great era of cathedral building in the thii:^eenth 
century was unplanned. It was these influences which created 
a separate science oFeconomics, designed to prove that it was 
not organizations but principles which were operating in 
the field of the pr(^UCtion and distribution of goods. Of 
course, it seemed important to these economists just what 
principles they thought up and advocated. Actually, how- 
ever, the only important thing was the little pictures in the 
back of the head of the ordinary man. So long as they existed 
the great organization was secure in its freedom and inde- 
pendence. 

In this situation people described difficulties in which or- 
ganizations found themselves solely in terms of individuals 
competing for money and became, as a result, extraordinarily 
mixed up in their diagnosis. Instead of guessing on the 
strength and stabijpty of the organization as one guesses on 
the future of a politicd^jnachine, they made their predictions 



200 T he Folklore of Capitalism 

on the basis of a system of bookkeeping which pretended that 
claims against organizations were tangible private property 
having a money value set by the laws of supply and demand. 

Hence, in estimating what organizations could or could 
not do, people talked only about whether the organization 
could “make money.” This method of thixikiAg> of course, 
prevented the governmental organization from doing any- 
thing in the distribution of goods. The Government could 
not “make money” since it was not supposed to be actuated 
by the profit rnptive. Hence it could not efficiently engage in 
the distribution of goods. Therefore, we could not “afford” 
to have the Government maintain our supply of skilled labor 
during the depression or preserve our resources, because the 
Government did not “own” the labor or resources. For this 
reason it could not “spend money” on such things without 
going bankrupt — just as an individual could not spend 
money on his neighbor’s property without going bankrupt. 

Guesses made by experts on these assumptions were almost 
invariably wrong. An amusing book during the depression 
entitled Oh Yeah'^ collected the predictions of the most 
prominent financiers, monetary experts, and economists and 
created uproarious laughter, so absurd did these predictions 
appear in the light of what followed. Guesses on the future 
of particular industrial organizations were not much better. 
It was easy to prove that if a man followed expert market 
advice he would consistently lose money. The best predic- 
tions came from men who were not using current fiscal sym- 
bols but who were thinking in tgms of organization. Floyd 
odium of the Atlas Corporation rose to a position of im- 
mense financial power by engaging in financial undertakings 
at the time when most experts had determined that financing 
Was unsafe because of the Securities Exchange Act and other 

^ By Edward Angly (Viking Press, 1931). 



T he Personification of Corporation 201 

governmental interferences with business. He was success 
ful because he thought in terms of control of great indus 
trial armies. 

In the current mythology a group of individuals were sup- 
posed to be compefirig \vnth each other in an effort to produce 
wealth and exchange it for a vague thing called capital. Capi- 
tal theoretically consisted of ownership of every^soit. pf use- 
fuljproductive property. But private ownership of this kind 
of property disappeared with the great organizations. By a 
gradual transference capital came to mean the ability to con- 
trol^bank credits, which had no particular relationship to 
productive]^opcrty. Control of bank credits came more and 
more into the hands of those who controlled the banks. If a 
corporation could get a respectable bank to say that its prop- 
erty (the habits and disciplines of its organization) was 
worth a given amount of money, it became automatically 
possessed of that sum because it could get the bank to tell 
the puBIic;;that its shares were worth that money. From 1920 
to 1930 capital began to be the money value which respect- 
able banks would put on the hopes of an enterprise. Finan- 
cial institutions began to rely on an institution called the stock 
exchan^to create capital for them. They went through a 
process called “floating” loans or stockjssues. This consisted 
in creating a market for engraved pieces of paper so that they 
were almost as readily exchangeable as currency. 

A new philosophy called “liquidity” sprang into being. 
The idea was that capital goods could be made almost like 
currency. Material wealth was supposed to be back of the 
pieces of pap er, just as gold was supposed to be back of the 
government issues of currency. It was, of course, realized that 
if very many people tried to cash in on these pieces of paper, 
they would lose their exchange value, but it was supposed 
that this would not happen. Material wealth behind these 
pieces of paper gradually included all sorts of^iatangiblc 



202 T he Fol\lore of Capitalism 

Aings, such as “good will’* which had been obtained by ad- 
vertising campaigns and “going coniccrn value.’’ 

Gradually the process o£ “capitalizing earning capacity” 
grew to be the rule. This meant that a share in an organiza- 
tion was worth any amount on which the earnings would 
be a reasonable rate of interest. This meant that the organiza- 
tion itself was the “wealth” or the “property.’' The law was 
not slow in following this make-believe and the circle was 
complete. Physical propmy came to be an unimportant ele- 
ment of capital. Values were based on what organizations 
could be expected to pay each year. 

Curiously enough in this reification of organization as a 
Form of property, the value of skilled labor as an asset re- 
caved ho legaPand very little economic recognition. It was 
possible for corporate organizations to spend money to keep 
their physical plant in repair during times of idleness. How- 
ever, it was not possible to educate or maintain skilled labor 
for future use. Bonds could be floated on hopes that organi- 
zations of executives would earn dividends in the future. No 
matter how ridiculous those hopes were, the public always 
bought. But a reservoir of skilled labor could not be capi- 
talized. Labor organizations could not incorporate and raise 
iiioney on their probable future earnings. This was not be- 
cause the future earnings of labor were less speculative. Noth- 
ing could have been more absurd than at least half of the in- 
vestments in industrial concerns. It was because nothing in 
the fiscal symbols of the time provided any mystical place for 
such an organization. 

This folklore which denied that la^r had a mord claim 
on an industrial organization produced most interesting re- 
sults. The textile industry in New England had a supply of 
docile labor which it exploited for years. Then it took the 
so-called “capital” thus accumulated and invested it in the 



T he Personification of Corporation 203 

South where labor was still cheaper. This enriched a few 
trust companies in Boston but left whole communities im- 
povejdshed. Nevertheless, under the creed of rpgged indi- 
vidualism, primitive-minded conservatives of New Ehgrand 
fougliTto the bitter end to preserve this manner of doing 
things. 

The relationship of governmental organization to indus- 
trial wreckage of this sort was entirely confused. Necessity 
compelled government action; theo^jdenied it. In a certain 
town in New York prior to the depression a large factory 
was growing larger. Homes had to be built for new work- 
men. Water, lights, and paving had to service these homes. 
Pressure was put on the municipality to service new addi- 
tions. Municipal expenditures went up to supply factory 
labor with a place in which to live. Everyone was happy 
since it was a “growing town.” Workmen were paying for 
their homes. 

When the depression came these workmen were dis- 
eWged. They could no longer pay_£axes. The burderi on 
the balance of the community became greater. Not only did 
the municipality have to keep up the additional expense, but 
thousands were thrown on relief. The situation became so 
bad that the Federal Government had to finance relief. 
Thereupon the manufacturing plant threw all its political 
force into an attempt to make the Government reduce the 
level of subsistence of the men as much as possible, so as to 
balance the national budget and not put false ideas in the 
heads of the workmen. The efficiency of private charity, as 
compared with government interference, was made the sub- 
ject of all industrial sermons. Unemployed were relentlessly 
persecuted on moral grounds, in spite of the fact that there 
were plenty of material goods to feed and„clothe them. It was 
thought sound economics to reduce them to the lowest level 



204 T he Folklore of Capitalism 

of subsistence and make the taking of that pittance as humili- 
ating as possible. Every move the Government made was ac- 
companied by hostile oratory and blind irritation. 

This was not done by ill-will. It was simply the result of 
thinking in terms of a fiscal fairyland in which industrial 
organizations were individuals and government was sup- 
posed to protect their property. 

Since corporate property had come to mean the right of an 
organization to distribute goods, the Government could not 
engage in such distribution without damaging the whole 
structure. Government itself could not be efficient because it 
did not operate for profit, which was an essential element of 
efficiency. If a man did not work for profit, he became bu- 
reaucratic, unless he happened to be a minister of the gospel, 
a professor, or perhaps a scientist. Hence, government clerks 
could not fail to be bureaucratic. This extended down to the 
lowest governmental units. Municipal light plants were bad 
in principle. 

Even charity could not be administered by the Govern- 
ment because the Government would not know where to 
stop. Needy and unemployed people would get the idea that 
the world owed them a living. This was supposed to rum 
their characters. Thus in the great drought which occurred 
in the Southwest at the end of President Hoover’s adminis- 
tration, money could be raised for the farmers only by the 
Red Cross. Government money could go only for crop loans, 
which was not thought to be such a dangerous use of the 
funds and would not have such a bad effect on the ch^wacter 
of the f^mers. 

In any event, the fact that government organization could 
not be put to practical use was tied up to character, the home, 
religion, law, and the science of economics. Any counter- 
proposal was some form of Socialism, which led to both 
bankruptcy and bureaucracy. 



The Personification of Corporation 205 

On one occasion only could the Government step into the 
temporal world of corporate organization and that was in 
time of war. Then all questions of where the money was 
coming from disappeared. Then the great corporate person- 
alities were supposed to subordinate their rights to a greatei 
cause. 

This book is not concerned with the unsolvable problem of 
whether America would have progressed faster or slower 
under some other set of myths. It does not attack the use of 
the corporate personality in folklore. The results have been 
the creation of one of the greatest productive machines that 
the world has.„.ever-k-newn, and this perhaps is justification 
enough if anyone is interested in justifying what has hap- 
pened. This book is concerned only with diagnosing the pres- 
ent difficulties which have come upon us now that the indus- 
trial feudalism is no longer protecting large groups of our 
citizens who demand security, and with trying to explain 
the ideological difficulties which prevent the creating of or- 
ganizations which will give that protection. We cannot be 
practical about social problems if we are under the illusion 
that we can solve them witTidut complying with the taboos 
and customs of the tribe. The corporate persgnaUty kpart of 
ou£^present religion. We must continue to refer to corpora- 
tions as individuals in public discourse so long as the words 
have emotional relevance. Since, however, we must use J^e 
words and ceremonies, it becomes important that we be able 
to use them intelUgendy- It becomes necessary, therefore, to 
analyze a Few of the principal rituals connected with the 
personification of corporate organization which are generally 
completely misunderstood. 

The two most important ceremonies which have drama- 
tized the rugged individualism of business organizations are 
those which surround the antit rus t-laws and the reorganiza- 
tion of insolvent corporations. The one is useful in times of 



2 o 6 T he Folklore of Capitalism 

prosperity. The other is called on in t\mes of adversity. Both 
are designed to perpetuate the illusion that it is men, and not 
organizations, with whom the Government at Washington 
is dealing. We will consider them in the next chapter. 



CHAPTER IX 


The Effect of the Antitrust haws in 
Encouraging Large Combinations 

In which it is shown how the antitrust laws enabled men to look 
at a highly organized and centralized industrial organization 
and still believe that it was composed of individuals engaged in 
buying and selling in a free market. 

W E have seen that the growth of great organiza- 
tions in America occurred in the face of a religion 
which officially was dedicated to the preservation 
of the economic independence of individuals. In such a situa- 
tion it was inevitable that a ceremony should be evolved 
which reconciled current mental pictures of what men 
thought society ought to be with reality. The learned my- 
thology of the time insisted that American industry was 
made up of small competing concerns which, if they were 
not individuals, nevertheless approach that ideal. “Bigness” 
was regarded as a curse because it led to monopoly and inter- 
fered with the operation of the laws of supply and demand. 
At the same time specialized techniques made bigness essen- 
tial to producing goods in large enough quantities and at a 
price low enough so that they could be made part of the 
American standard of living. In order to reconcile the ideal 
with the practical necessity, it became necessary to develop 
a procedure which constantly attacked bigness on rational 
legal and economic grounds, and at the same time never 
really interfered with combinations. Such pressures gave rise 
to the antitrust laws which appeared to be a complete pro- 
hibition of large combinations. The same pressures made the 



2 o 8 T he Fol\lore of Capitalism 

enforcement of the antitrust laws a pure ritual. The effect of 
this statement of the ideal and its lack of actual enforcement 
was to convince reformers either that large combinations 
did not actually exist, or else that if they did exist, they were 
about to be done away with just as soon as right-thinking 
men were elected to office. Trust busting therefore became 
one of the great moral issues of the day, while at the same 
time great combinations thrived and escaped regulation. 

This phenomenon is a familiar one and is constantly re- 
curring in the growth of all social institutions. The simplest 
example is the institution of prostitution. We celebrate our 
ideals of chastity by constantly engaging in wars on vice. We 
permit prostitution to flourish by treating it as a somewhat 
minor crime and never taking the militant measures which 
would actually stamp it out. The result is a sub rosa institu- 
tion which organizes the prostitutes after a fashion, at least 
to the extent that there never seems to be any shortage in our 
large cities. It is the writer’s observation (which cannot, of 
course, be proved by statistics) that the more violent the wars 
on prostitution in a city whose population has a peculiar need 
for this sort of enterprise, the greater will be the control and 
discipline in the organization which supplies this need. Un- 
der the pressures of moral attack it will drift into the hands 
of ruthless and determined leaders. The privates in the army 
will endure harder lives while a battle is going on. The white- 
slave trade was the product of an exceedingly puritanical era. 

A curious situation is presented. Everyone knows that vice 
will never be “suppressed” in New York. Nevertheless, every- 
one thinks that we ought to keep on trying. Therefore, we 
hire preachers and policemen to do this job for us. In the 
meantime we continue to patronize vice and our best young 
people treasure among their most exciting experiences in- 
cursions into the underworld. It becomes a fascinating sub- 
ject for movies, novels, and plays for people who prefer to 



T he Effect of the Antitrust haws 209 

live their lives vicariously. The institution of prostitution 
continues to thrive after its peculiar fashion. 

The phenomenon of the political machine is similar, 
though the moral conflict is not so keen. Preachers and in- 
vestigators are constantly employed in removing politics 
from politics. They do this by denouncing the politicians on 
the other side. The politicians on their own side are reluc- 
tantly accepted on the ground that one must fight fire with 
fire. Prohibition offered another example, in which we 
turned the liquor trade over to bootleggers. Under the en- 
forcement campaign, powerful organizations to distribute 
liquor grew up in self-protection, with disciplines like those 
of an army in war. No bartenders* union ever had the 
strength and morale of these courageous men who supplied 
whisky to a thirsty populace in that interesting era when 
good church people were justifying themselves in putting 
poison in liquor to prove to the sinful the eternal lesson that 
the wages of sin is death. I realize that it will be a shock to 
many readers to apply the word “courageous** to criminals, 
because it is a polar term and not supposed to include any 
form of bravery which is not manifest in a respectable cause. 
In the late war the Germans were not supposed to be cou- 
rageous men fighting for an ideal. They were called “Huns.** 
Criminals in a similar situation are called “rats,** on the 
theory that they fight only when in a corner. A distinction is 
made between “courage** and “brute force** on the theory that 
those on the other side are like animals who have no souls. 

These illustrations seem a far cry from the antitrust laws, 
but actually they are both examples of the same sort of psy- 
chological reaction. Granted an insistent social demand, 
which opposes a deeply felt ideal, and a conflict of this kind 
between two institutions — one respectable and moral, ex- 
emplifying the ideal, the other sub rosa and nonrespectable, 
filling the practical need — is as inevitable as the reaction of 



210 The Folklore of Capitalism 

a man sitting on a hot stove. Without a grasp of this prin- 
ciple, it is impossible to understand the antitrust laws, be- 
cause the discussion centers around whether the antitrust 
laws should or should not have been passed. People sit up all 
night writing books to contradict each other on whether the 
antitrust laws have done any “good.” They become blind to 
the fact that they were part of the total cultural situation 
which tolerated great organizations in the face of a deeply 
felt ideal that there was a curse to “bigness.” Corporations 
(before the era of public-relations counsel) were pictured as 
fat, greedy men preying upon the poor. Therefore, there 
had to be a crusade against them. That crusade resulted in 
the antitrust laws. 

The old trust-busting era was a time when corporations 
were big men who were almost as wicked as criminals. Their 
actions were actually ruthless in the extreme and quite in 
keeping with the type of personification in the public mind, 
as anyone may note who reads the financial history of the 
period. However, in observing this development, it should 
not be forgotten that organizations are a product of the forces 
of practical needs and ideals. If the conflict is keen, less re- 
spectable and less scrupulous persons are more efficient, be- 
cause the activities have to be of a sub rosa character. Institu- 
tions, by a process of natural selection, achieve the character 
given to them by society. So it was with corporations in the 
nineteenth century. Unscrupulous men were demanded in 
order to make the corporation conform to the picture men 
had of it. Therefore, unscrupulous men rose to power. 

By unscrupulous men, of course, we mean men who were 
not caught in the common ethics with regard to “bigness,” 
and who were therefore ready to use practical means to avoid 
the handicap which such ethics put upon the formation of 
organizations. We do not mean unkindly men. The careers 



T he Effect of the Antitrust haws 2 1 1 

of Carnegie and Rockefeller show that they had a strong 
sense of social obligation which asserted itself after the con- 
flict over their methods had died down. The term “unscrupu- 
lous,” being a polar word, is full of traps. It has no meaning 
other than describing an individual who is not caught in any 
particular set of scruples. It means nothing in a vacuum, other 
than a realization that the most effective means are the best 
to obtain a given end. 

In this atmosphere the antitrust laws were the answer of a 
society which unconsciously felt the need of great organiza- 
tions, and at the same time had to deny them a place in the 
moral and logical ideology of the social structure. They were 
part of the struggle of a creed of rugged individualism to 
adapt itself to what was becoming a highly organized society. 

Thus in those days anyone who attacked the “Trusts” could 
achieve the same public worship as a minister of the gospel 
who had the energy to attack vice. It was this that made 
Theodore Roosevelt a great man. Historians now point out 
that Theodore Roosevelt never accomplished anything with 
his trust busting. Of course he didn’t. The crusade was not 
a practical one. It was part of a moral conflict and no preacher 
ever succeeded in abolishing any form of sin. Had there 
been no conflict — had society been able to operate in an era 
of growing specialization without these organizations — it 
would have been easy enough to kill them by practical 
means. A few well-directed provisions putting a discrimina- 
tory tax on large organizations would have done the trick, 
provided some other form of organization were growing at 
the same time to fill the practical need. Since the organiza- 
tions were demanded, attempts to stop their growth neces- 
sarily became purely ceremonial. As fast as one cloak was 
stripped off and declared illegal by the courts, other cloaks 
were manufactured and put on. The antitrust laws, being a 



212 The Folklore of Capitalism 

preaching device, naturally performed only the functions of 
preaching/ 

The actual result of the antitrust laws was to promote the 
growth of great industrial organizations by deflecting the 
attack on them into purely moral and ceremonial channels. 
The process was something like this: Since the corporation 
was a person, mere bigness could not make it a bad person. 
One cannot condemn his neighbor simply because he is big 
and strong. Therefore, the courts soon discovered that it was 
only “unreasonable” combinations which were bad, just as 
any court would decide that a big, strong neighbor should 
not be incarcerated so long as he acted reasonably. In various 
other ways the actual enforcement of the antitrust laws was 
completely emasculated by the courts,^ not because the courts 

1 “Moreover, a half century of experience has been so inconclusive and 
uninstructivc that business today does not know what policy it wants the 
government to pursue. A part of the business world vigorously demands 
laws to protect, preserve, and extend competition. Another part complains 
of the effects of too vigorous competition which it is the purpose of our 
laws to maintain. Most men who come to the Department of Justice, com- 
plaining of someone’s else price-fixing, implore us to tell them how to 
‘stabilize’ their own industry, which is a polite term for restraining of com- 
petition that they find it difficult to meet. Businessmen disagree violently 
whether it is too much competition, or too little competition, that causes 
most evils in business. 

“Results show, however, that the policy to restrain concentration of 
wealth through combinations or conspiracies to restrict competition have 
not achieved their purpose. Concentration of ownership and control of 
American industry was never greater than today. Wc cannot deny that it 
fell to lawyers at the bar, on the bench, and in administrative posts to exe- 
cute the policy which has thus resulted in disappointment.” 

(Speech of Robert H. Jackson at Sea Island, Georgia, May 28, 1937 *) 

^Ibid, “A failure to enforce the Antitrust Laws would have been bad 
enough but they were not merely ignored, they were perverted. In 1908 the 
Court discovered {Loewe v. Lawlor, 208 V.S. 274) that labor unions were 
monopolies in restraint of trade if they attempted to boycott the goods of any 
firm that was engaged in interstate commerce. Those who enjoy compara- 
tive studies of the judicial process will find it interesting to note the 
elasticity of the interstate commerce conception in the cases where it was 



T he Effect of the Antitrust Laws 213 

were composed of wicked and hypocritical people, anxious 
to evade the law, but because such a process is inevitable 
when an ideal meets in head-on collision with a practical 
need. The process is just as unconscious as was the toleration 
of speak-easies in dry communities during prohibition. 

utilized against labor as compared with the narrow interpretation when 
the sugar trust was under consideration. 

“After experimenting for many years with efforts to enforce the Anti- 
trust Laws through the Court, the Congress enacted the Federal Trade 
Commission Act, which was designed to add to the existing remedies 
against monopoly proceedings before an administrative body. It was 
thought, apparently, that if the Courts would not enforce the laws them- 
selves, they would let someone else do so. This hope was in the main 
disappointed. 

“The Federal Trade Commission has had its powers whittled away and 
has been cramped by Court interpretations and judicial constructions. It 
was directed to prevent unfair methods of competition. Of course it was 
impossible to define by statute the multitude of unfair practices. The Com- 
mission was expected, after investigation, to determine what practices were 
unfair methods of competition. But the Supreme Court promptly decided, 
*It is for the Courts not the Commission ultimately to determine as a mat- 
ter of law what they include,’ and it went back to its old precedents for 
the definition {Federal Trade Commission v. Warren, 253 U.S. 420). The 
Court next decided that it would not only define the terms but that it 
would also examine the whole record in any case and ascertain the issues 
presented and whether there were material facts in evidence not given 
sufficient weight by the Commission {Federal Trade Commission v. Curtis 
Publishing Company, 260 V.S. 568). Chief Justice Taft filed an opinion, 
the substance of which is that he was unable to decide just what it was 
that the majority was deciding. It was apparent, however, from the out- 
come, as the Chairman of the Commission stated, that the Court had 
claimed the power to frame an issue of its own, and to support it by its own 
findings of fact. 

“Another blow to the Commission was dealt in Federal Trade Commis- 
sion V. Klessner (280 U.S. 219) and Federal Trade Commission v. Rala- 
dam (283 U.S. 643). Professor Bates describes the effect of these two deci- 
sions to be that when the Commission ‘attempted to check monopoly it 
found that public deception was the essential and when it attempted to 
check public deception it found tliat monopoly was the essential,’ of its 
power. 

“At tlie end of this long road wc read like an epitaph Senator Wagner’s 



214 The Folklore of Capitalism 

In this way the antitrust laws became the greatest protec- 
tion to uncontrolled business dictatorships.^ The process by 
which this was accomplished needs further explanation. If 
the practical need of these great organizations had not vio- 
lated a current taboo, men would never have tolerated the 
abuses which grew up around them. For example, there was 
no sense whatever in their methods of levying tribute on in- 
vestors through issues of securities which worked in the long 
run not unlike the numbers racket in New York City — that 
is, the persons on the inside gave out no more prizes than was 

statement that ‘no one can state authoritatively what our national policy 
is.’ The Senator spoke with characteristic restraint. He might well have 
added that no one can state authoritatively what our national policy can be 
under the attitude of the Court. 

“I am bound to say that this is a record in which I, as a lawyer, can 
find little satisfaction. No group in the United States is louder in its de- 
mands for democratic government than the Bar. It is always issuing pro- 
nouncements in which it fears dictatorship, and always professing fear lest 
fundamental institutions be impaired or undermined. At the same time, no 
group in the United States has so consistently thwarted the effons of the 
democratic government to establish and enforce a policy conccdcdly within 
its constitutional power as have the lawyers, on the bench and off. They 
have systematically denatured and sterilized every statutory policy designed 
to repress monopoly,” 

^Ibid. ‘‘While the country has forbidden monopoly it has also been sub- 
sidizing it. Monopoly has had tax advantages that have aided its rise. While 
the sale of a small business to another who wished to continue it as such 
would be subject to a capital gains tax, if it were absorbed by a big business 
the matter could be arranged in the form of a tax-free ‘reorganization.’ Tlie 
tax-free reorganization privilege has been a powerful incentive for the con- 
centrating of business. The advantage in single transactions, at the cost of 
the Treasury, has often exceeded the whole annual appropriation for anti- 
trust enforcement. Enforcement has been and is inadequately financed. 

“Moreover, the privilege of paying dividend profits free of tax from one 
corporation to another operated as a subsidy for the holding companies one 
of the most favored forms of creating and operating monopoly. The recent 
repeal of this privilege and the substitution of an intercorporate dividend 
tax have already proved highly effective in dissolving holding companies, 
and undoubtedly an increase in that tax would prove an automatic discour- 
agement of that particular type of antitrust violation.” 



T he Effect of the Antitrust Laws 215 

absolutely necessary to keep the country interested. There 
was no common sense in the bitter wars between these great 
organizations, or in their failure to recognize any responsi- 
bility which government from time immemorial has recog- 
nized toward its retainers. But neither the public nor the or- 
ganizers thought of these industrial organizations as “gov- 
ernment.” The trick of personification veiled this obvious 
fact from their eyes. Since the organizations were persons, 
they should be treated as if they had free will and moral re- 
sponsibility. Regulation was bureaucracy and tyranny over 
individuals. 

Therefore, when corporate abuses were attacked, it was 
done on the theory that criminal penalties should be invoked 
rather than control. Senators could always adopt the side of 
the people on the corporation issue and demand prosecution 
of the great enterprises under the antitrust laws. Since they 
had no direct responsibility for such prosecutions, this 
method gave them the advantages which go with complete 
lack of responsibility for results. Theirs was but to point the 
way. In this manner every scheme for direct control broke 
to pieces on the great protective rock of the antitrust laws. 

The confused results of antitrust law enforcement on the 
practical control of organizations were not recognized be- 
cause men did not think of great corporations as public or- 
ganizations like an army. Yet in fact the effect was the same 
as if courts in time of war should lay down and clarify the 
principles of what were reasonable or unreasonable combina- 
tions of troops. Under such a theory generals making unrea- 
sonable combinations would be prosecuted, but of course 
given the benefit of counsel to prove that their particular 
combinations of troops were reasonable. The theory of this 
process would be that while it might delay things a bit at 
the time, the principles of strategy would become clearer 
and clearer as time went on and thus the army would become 



2 i 6 The Folklore of Capitalism 

more efficient. Generals who understood these principles 
would rise to the top following the great fundamental prin- 
ciples of laissez faire army organization. If the process failed 
to achieve results, it would be the fault either of the antitrust 
division of the army or else of the courts. 

Of course, when this is applied to an army it sounds like 
obvious nonsense. That, however, is only because we think 
of the army in terms of human organization and not of prin- 
ciple. Had we thought of the great industrial enterprises in 
terms of organization, the results would have been far dif- 
ferent in terms of governmental regulation. Since we thought 
of them in terms of individuals to whom correct principle 
should be taught by the precept and example of the judicial 
process, the antitrust laws, designed to offer some sort of regu- 
lation, actually became the great bulwark of defense of these 
organizations against any regulation whatever. They offered 
an escape valve through which the energy of reformers was 
dissipated, permitting the organizations to go on undis- 
turbed. 

Within the organizations themselves, men were not theo- 
retical but intensely practical. They did not follow econo- 
mists and lawyers. They used them. Realizing the advantages 
of a respectable position in society, they employed public- 
relations counsel, skilled in the use of propaganda. After the 
War, cartoons showing corporations to be great, greedy men 
became fewer and fewer. Gradually they changed themselves 
from bad to good men in the public eye. They took the role 
of the sinner who had repented and become a saint. Men 
reading Josephson’s Jobber Barons, The Great American 
Capitalists, i86i-igoi,^ were able to say: ‘‘Once unenlight- 
ened corporations used to do these bad things, but now they 
have reformed and do not do them any more,” The era of 


^Harcourt, Brace, 1934* 



T he Effect of the Antitrust haws 217 

trust busting disappeared. It was still good for an occasional 
battle cry, but as the industrial empires grew in power their 
symbols became more and more respectable. The words 
“tainted money** as applied to corporate donations went out 
of common use. Theodore Roosevelt, with his big stick that 
never hit anybody, accomplished two things. First, he con- 
vinced the public that if we would only drive politics out of 
the Department of Justice the laws were sufficient to make 
these big individuals really compete. Second, he convinced 
corporate executives that it was a good thing to hire public- 
relations counsel and show that they also were followers of 
the true religion. 

The antitrust laws remained as a most important symbol. 
Whenever anyone demanded practical regulation, they 
formed an effective moral obstacle, since all the liberals 
would answer with a demand that the antitrust laws be en- 
forced. Men like Senator Borah founded political careers on 
the continuance of such crusades, which were entirely futile 
but enormously picturesque, and which paid big dividends 
in terms of personal prestige. And, of course, people like 
Borah were sincere in thinking that the moral answer was 
also the practical answer. Thus, by virtue of the very crusade 
against them, the great corporations grew bigger and bigger, 
and more and more respectable. This is not an attack on the 
process. It was an inevitable one in such an intellectual and 
moral atmosphere. It allowed the organizing ability of the 
American people to develop. Whether it would have de- 
veloped faster or slower under other conditions is a question 
which it is not the province of a descriptive analysis to 
answer. 

In any event, the Federal antitrust laws, since the ’nineties, 
have stood as a great moral gesture which proves that in a 
nation of organizations individuals really are supreme; or, 
if not, they arc going to become so very soon through the 



2 1 8 The Foll^lorc of Capitalism 

intervention of the Federal Government. Plenty of indi- 
vidual economists have written and talked about the trust 
problem as one of organization and control. Yet the general 
tenor of public debate about great industrial organizations, 
both conservative and radical, has been based on the concep- 
tion that the only proper type of society is composed of un- 
organized competitive individuals. In each great depression 
the attack on industrial organizations is renewed, coupled 
with the demand that they be dissolved — a demand which 
is always defeated because of the forces which make such or- 
ganization essential. In Thorstein Veblen and His America, 
Joseph Dorfman reviews the debates which attended the de- 
pression in the ’nineties. The following quotation from that 
book® could be used as descriptive of the recent depression 
with only a few changes in names. 

The Populist Party had its first national convention at Omaha in 
July 1892. Donnelly again delivered the preamble, with a ringing 
arraignment of the corporate interests, and the delegates staged 
a tremendous demonstration. One unsympathetic critic wrote: 
“No intelligent man could . . . listen to the wild and frenzied 
assaults upon the existing order of things, without a feeling of 
great alarm at the extent and intensity of the social lunacy there 
displayed. . . . When that furious and hysterical arraignment 
of the present times, that incoherent intermingling of Jeremiah 
and Bellamy, the platform, was adopted, the cheers and yells 
which rose like a tornado from four thousand throats and raged 
without cessation for thirty-four minutes, during which women 
shrieked and wept, men embraced and kissed their neighbors, 
locked arms, marched back and forth, and leaped upon tables 
and chairs in the ecstasy of their delirium — ^this dramatic and 
historical scene must have told every quiet, thoughtful witness 
that there was something at the back of all this turmoil more 
than the failure of crops or the scarcity of ready cash. And over 
all the city during that summer week brooded the spectres of 

® pp. 88-89. 



The Effect of the Antitrust Laws 219 

Nationalism, Socialism and general discontent.” Southern agra- 
rians characterised the nomination of Grover Cleveland “as a 
prostitution of the principles of Democracy, as a repudiation of 
the demands of the Farmers’ Alliance, which embody the true 
principles of Democracy, and a surrender of the rights of the 
people to the financial kings of the country.” A Western agrarian 
leader spoke of Cleveland as a “fossiled reminiscence.” 

In Minnesota Donnelly was nominated for governor at a 
meeting addressed by the socialist Robert Schilling of Milwaukee. 
Donnelly declared that a horde of millionaires expected to be- 
come titled aristocrats and, if their progress were not arrested, 
they would fulfil their wishes. The farmers of Minnesota and 
the Dakotas, according to Donnelly, were defrauded of a billion 
dollars by an organised conspiracy of railroad men and grain 
speculators. The Carnegie Steel Company sent for the hated 
Pinkertons in an attempt to break a strike at its plants in Home- 
stead, Pennsylvania, and there was a bloody battle when they 
arrived. The entire state militia was called out, martial law was 
declared, and the strike leader was held for murder. Alexander 
Berkman, an anarchist, attempted to kill H. C. Frick, one of the 
most hated anti-union employers in the country, and a private in 
the militia was tortured by his officers for publicly expressing 
sympathy with the act. Davis Rich Dewey declared that the con- 
flict “gave rise to grave forebodings as to the stability of republi- 
can institutions.” In Congress, in the press, and on the public 
platform “the Pinkertons, branded as mercenaries and hirelings, 
were charged with treason and were said to be employed not only 
to protect the property of employers, but to . . . provoke [the 
populace] to violence . . . as an excuse for the calling-out of 
troops.” The strikers declared that “the public and the employees 
aforesaid have equitable rights and interests in the said mill 
which cannot be modified or diverted by due process of law. . . . 
The employees have the right to continuous employment in the 
said mill during efficiency and good behaviour.” Laughlin de- 
nounced this “inalienable right to continuous employment” and 
attributed the doctrine to the “one-sided reading” of the strikers, 
particularly to their exclusive attention to Henry George. So- 



220 T he Folklore of Capitalism 

cialism made converts on the apparent evidence “that the indi- 
vidualistic system of competition had broken down.” The courts 
ordered the Standard Oil trust dissolved, but a new device, the 
holding company, made its appearance. 

And note particularly that the paragraph closes with a 
reference to the dissolution of the Standard Oil trust and the 
beginnings of the holding company. As this is being written, 
a crusade against the Aluminum Company of America is in 
the first stages of its long struggle through the courts. 

This was the procedure of attempts to control the great in- 
dustrial organizations of this country in the interests of 
democratic and humanitarian service to those dependent on 
them. Attempts to reform usually ended with an appeal to 
the old creed under whose protecting mantle these institu- 
tions had grown, the creed of rugged individualism, with the 
organizations personified as individuals. 

The reason why these attacks always ended with a cere- 
mony of atonement, but few practical results, lay in the fact 
that there were no new organizations growing up to take 
over the functions of those under attack. The opposition was 
never able to build up its own commissary and its service 
of supply. It was well supplied with orators and economists, 
but it lacked practical organizers. A great cooperative move- 
ment in America might have changed the power of the 
industrial empire. Preaching against it, however, simply re- 
sulted in counterpreaching. 

And the reason for this was that the reformers themselves 
were caught in the same creeds which supported the institu- 
tions they were trying to reform. Obsessed with a moral at- 
titude toward society, they thought in Utopias. They were 
interested in systems of government. Philosophy was for 
them more important than opportunism and so they achieved 
in the end philosophy rather than opportunity. 



The Effect of the Antitrust Laws 221 

Edward Bellamy saw in the corporation itself a step 
toward Socialism. He thought of a future world of national- 
ized industry. He was the forerunner of the N.R.A. and the 
attacks on his preaching resembled very much the attacks on 
the recent National Recovery Administration. His failure in 
diagnosis was much the same as that of the N.R.A. He be- 
lieved that change in social institutions occurs when right- 
thinking, intelligent men get together and plan to change 
them. He saw in political argument over principle, not a 
symptom of spiritual conflict, but a positive directing force. 

When the spiritual conflict died down after the panic of 
the ’nineties, the old religion reasserted itself. The antitrust 
laws became the great myth to prove by an occasional legal 
ceremony that great industrial organizations should be 
treated like individuals, and guided by principle and precept 
back to the old ways of competition and fair practices, as in- 
dividuals were. This was then, and is today, the principal 
utility of that massive moral philosophy known as antitrust 
legislation. 

One great change, however, did come over corporate ac- 
tivity because of the philosophy which produced the anti- 
trust laws. Since everyone thought of these great enterprises 
as individuals which should be moral and gentlemanly in 
their dealings, they came gradually to conform to those stand- 
ards. This is in accordance with the principle of political 
dynamics which makes it inevitable that an institution will, 
in the long run, conform to the character which men give 
it. The antitrust laws were based on a popular conception 
that great corporations could be made respectable. Following 
that ideal, great corporations did become respectable. 

The old days were marked by ruthless suppression of com- 
petitors by any means available, including discriminatory 
freight rates, locally ruinous prices, and any sort of under- 
cover tactics to drive out small competitors. Men like Rocke- 



222 T he Foll^lore of Capitalism 

feller did not hesitate to use devices which were illegal and 
immoral according to the standards of today. Today the cor- 
porate practices which most effectively give great organiza- 
tions their positions of dominance follow, with the greatest 
fidelity, the current moral concepts of what an individual 
should do. The most important among those methods are 
(i) the manipulation of securities; (2) the pooling of pat- 
ents; (3) price leadership and control. A brief analysis of 
these practices will illustrate how great organizations, operat- 
ing in a folklore which refused to think in terms of organiza- 
tion, nevertheless obtained respectability. 

I. The manipulation of securities. Here we have a device 
which current morals consider respectable so long as inves- 
tors do not lose money. The wrecking of great organizations 
to make money on the stock violates all our standards. The 
securing of control in order to “build up” an organization is 
considered one of the higher duties of our industrial leaders. 
It is well known that owning a small percentage of stock 
gives substantial control, provided that no one else has a 
large percentage. This minority stock control, aided by the 
holding company device which we have already described, 
permits individuals to rule vast empires without any sub- 
stantial investment whatever. Popular magazines like the 
Saturday Evening Post hail control acquired in this way as 
a great achievement. Control is obtained mostly by bankers, 
a class which in the long run has always occupied a position 
of the highest dignity and respectability. All the myths sur- 
rounding bankers fortify them better than any other class 
against radical attack. This is at least one of the reasons for 
the acceptance of banker control and for the power which 
lies in the slogan, “Government must not interfere with busi- 
ness.” To illustrate, we quote an incident described in the 
syndicated columns of John T. Flynn: 



The Effect of the Antitrust Laws 223 

Now the Mid-America Corporation controls the Allegheny Cor- 
poration and the Allegheny Corporation, thru a series of holding 
companies, controls a vast network of great railroads and all 
kinds of important industries. There is over three billion dollars 
invested in these vast properties. This money is not the money of 
the Allegheny Corporation or of the Mid-America which controls 
it. It is the money of countless investors, most of them small in- 
vestors. Furthermore, the properties themselves are touched with 
a well-organized public interest. 

They were dominated until the crash by the Van Sweringens. 
Then they fell into the hands of a New York bank. Then, thru 
an investment of a few million dollars, they were thrown into the 
hands of an Indiana fruit jar manufacturer. Now they have 
toppled into the basket of two young unknown stock brokers 
with an investment of not more than lo million dollars in this 
vast empire. Is it unreasonable to ask that it is about time that 
these great properties and these extensive business investments 
cease to be kicked about? 

Robert R. Young, one of the young stock brokers who, with 
a handful of pennies, now sets out to rule and reorganize these 
giant properties, seems to have been doing very nicely down in 
Washington. On the witness stand before Sen. Wheeler’s com- 
mittee he conducted himself smoothly and with tact. When, 
however, he was pressed on the question as to whether, with his 
pitifully small investment, he should be permitted to settle the 
fate of these immense public properties, he became a little 
annoyed. 

The proposal was actually made to him that the public interest 
and the interest of investors seem to require that the holding 
company stock which he has now managed to get hold of and 
which thru a series of slick holding company schemes of the Van 
Sweringens dominates these properties, ought to be put into 
trust, perhaps into the hands of a committee of trustees named 
by the I.C.C. Young then lost his smoothness altogether and an- 
nounced somewhat wrathily that “there was too much Govern- 
ment in business/’ {W ashington Daily News, May 31, 1937.) 



224 T he Foll^lore of Capitalism 

The respectability of such devices was constantly under at- 
tack by liberals; yet they failed to make any appreciable head- 
way against the mythology. The reason, of course, was that 
since logic did not create that mythology, logic could not 
destroy it. It was a product of the conflict created by great or- 
ganizations struggling and finally achieving a place in the 
mystical hierarchy of rugged individuals. Liberals, caught in 
the same religion, usually ended by supporting the oracles 
of its authority. 

For example, John T. Flynn, whom we quote above, wrote 
much about corporate manipulation, always in a state of 
amazement that such things could exist in a country of think- 
ing men. Therefore, he shared the ultimate fate of all liberals 
who think that reform lies in trying to make institutions live 
up to their creeds. He testified with great earnestness against 
Roosevelt’s proposal to change the personnel of the Supreme 
Court in order to stop its constant interference with legisla- 
tive and economic policy on the part of the Government. 
This very institution which had dramatized and given vi- 
tality to those little pictures of the corporate personality 
which were responsible for making the holding company 
even in its most fantastic forms acceptable, was defended by 
a man who crusaded to make society conform to those pic- 
tures. The Court, which had thrown the mantle of the indi- 
vidual around the great corporate enterprise by identifying 
those who attempted to regulate it as attackers of freedom 
and the home, had become in his mind the actual protector 
of freedom and the home. The reason he defended it was that 
he needed the little pictures of a society of individuals which 
the Court was dramatizing in order to carry on his business 
as a reformer. 

That general point of view, shared by most liberals, was 
expressed by the philosophy underlying the antitrust laws. 
It provided a ceremony in which the efforts of reformers 
could be dramatized, and through which opportunistic prac- 



T he Effect of the Antitrust haws 225 

deal control could always be defeated, because liberals always 
disliked political control which was in opposition to princi- 
ple. 

2. The pooling of patents. Here we have an interesting ex- 
ample of one individualistic symbol used to avoid the logical 
consequences of another. The patent law became one of the 
most effective devices for emasculating the antitrust laws.® 
Patent law was supposed to protect the individual inventor 
against exploitation. An obviously effective way of doing this 
would have been to guarantee the inventor a proportion of 
the fruits of his invention. This, however, would have been 
paternalism and not individualism. Hence the inventor was 
given the right to sell his patent to another individual. Pro- 
tection was accorded to those inventors who were good busi- 
nessmen. Those who were not obviously did not deserve con- 
sideration. To give them protection which no one could 
wheedle out of them would have been as great an interference 
with the sacred right of contract as minimum-wage laws for 
women, according to the thinking of the time. 

Since the patent laws obviously were designed to protect 
“owners’* of patents rather than inventors, it became possible 
for an industrial organization to own all the patents neces- 
sary for an entire industry, which they could license to others 
on terms which gave them control of prices. This made the 
corporation appear as the heir of the individual inventor. 
Naturally, there were limits to this, as the confused line of 
decisions on the pooling of patents shows. However, those 
limits were vague and offered little resistance to the inventive 
genius of lawyers who were able to invent new rituals to 
achieve these results as fast as the old ones were outlawed. 

® Ibid. “While the nation has forbidden monopoly by one set of laws it has 
been creating it by another. Patent laws, valuable as they may be in some 
respects, often father monopoly. Unless we are prepared to reconsider the 
conditions upon which we will extend patent protection, we can have no 
consistent antimonopoly policy.” 



226 T he Folklore of Capitalism 

In addition to this, it was never quite clear just what was 
an invention which could be patented and what was not. In- 
fringement suits were costly and always uncertain. The pat- 
ent law, operating under forces which made it one of the in- 
struments of organized control over industry, became one 
of the most intricate mysteries of the law — a combination of 
law and mechanics under which almost any results might 
be achieved. Patent lawyers became a class apart. The great 
men in this specialty represented great organizations. Poor, 
struggling inventors could obtain only poor, struggling law- 
yers whenever they opposed corporate interests. 

And finally the practice grew up of corporate enterprises 
hiring men to make inventions as their agents. This, under 
the familiar doctrine of agency, made the organization itself, 
rather than the individual, the “inventor.” And thus the pat- 
ent law, designed to protect poor inventors and at the same 
time treat them as rugged individuals, became one of the 
most effective instruments to escape the disorganizing force 
of too logical an application of the antitrust laws. 

3. Market dominance and price leadership. In the old days 
the methods of building up large organizations and suppress- 
ing competition were crude and direct. Men met in secret 
sessions and planned their campaigns with the frankness 
of military leaders. The antitrust laws took away respecta- 
bility from that way of combining and made it somewhat 
dangerous. Agreements in restraint of trade were hard to 
prove; even when proved, they must be shown to be unrea- 
sonable. However, cooperation in its essence could not be 
unreasonable, since it was not an agreement. It was simply 
the tendency of free men to get along with each other. The 
difference between combination and cooperation is hard to 
define, so the word “intent” was used to distinguish them. 
Results achieved with one intent were legal which would 
have been illegal if another kind of intent had been found. 
Thus the results became unimportant and the law confined 



T he Effect of the Antitrust haws 227 

itself to the philosophical problem of the state of mind at the 
time. The great principle of competition was not violated 
even where men did not compete, provided that they did not 
intend to agree not to compete. 

Thus the phenomenon known as “price leadership” be- 
came the dominant factor in establishing control on the part 
of great organizations. If men refused to follow the practices 
of the recognized and respected members of their industry, 
they were regarded as “chiselers.” Various pressures were 
put on them to follow published prices. These pressures could 
seldom be proved. Members of an industry did not have to 
“agree” not to indulge in “cutthroat” competition. All that 
was necessary was the general belief that such competition 
was not proper and would lead to retaliation. 

Trade associations became an important part of business 
organizations. They formed committees and drew up codes 
of ethics. These codes did not mention any principles of price 
leadership. Such a thing was not included within the ad- 
mitted objectives. The codes were concerned with coopera- 
tion and fair dealing between Christian men, who assumed 
a sort of moral obligation to be friendly. They affected prices, 
not because of any specific agreements, but because they took 
away the respectability of sharp competition among their 
members. It was impossible to attack anything as subtle as 
this sort of price control under the antitrust laws. 

And so the antitrust laws, instead of breaking up great or- 
ganizations, served only to make them respectable and well 
thought of by providing them with the clothes of rugged in- 
dividualism. The N.R.A. expressed the change which had 
come over men’s thinking when it permitted corporations to 
combine in order to eliminate “unreasonable” competition. 
The profit motive, which at one time was a respectable justi- 
fication for any sort of price-cutting, had become a somewhat 
immoral thing because of the competing symbol of coopera- 
tion. 



228 


The Fol\lore of Capitalism 

The net result of the antitrust laws was to make the most 
effective forms of competition, i.e., competition that hurt, ap- 
pear to be a lack of a cooperative and Christian spirit. They 
did this by eliminating the more brutal practices of great or- 
ganizations. Without these laws we might have had the car- 
tel system, adopted in Europe, which raised prices immoder- 
ately without much regard for the public. On the other 
hand, if the antitrust philosophy had not been developed, it 
is doubtful if the great organization could have achieved such 
an acceptable place in a climate of opinion in which rugged 
individualism was the chief ideal. In any event, it is obvious 
that the antitrust laws did not prevent the formation of some 
of the greatest financial empires the world has ever known, ^ 

7 Industrial Holding Companies — Gross Assets as of December 31, 1935, 


of Fifteen Important Companies:* 


Gross Assets 


Date of Or- 

as of Dec, 

Company 

ganization 

J935 

Allied Chemical and Dye Corp. . 

. . 1920 

$400,100,000 

American Radiator and Standard Sanitary Corp. 1929 

159,100,000 

Crown Zcllerbach Corp 

. . 1928 

101,300,000 

Eastman Kodak Co 

. . 1901 

168,300,000 

Gulf Oil Corp. (of Pa.) 

. 1922 

430,200,000 

International Paper and Power Co. . 

. . 1928 

88i,400,ooot 

Koppers Co 

. . 1924 

177,300,000 

Loew’s, Inc 

. . 1919 

129,300,000 

Pullman, Inc 

. . 1927 

258,600,000 

Sinclair Consolidated Oil Corp. . 

. . 1923 

331,100,000 

Standard Oil Co. of New Jersey . 

. . 1882 

1,895,000,000 

Texas Corp 

. . 1926 

473,800,000 

Tide Water Associated Oil Co. . 

. . 1926 

182,800,000 

Union Carbide and Carbon Corp. 

. . 1917 

336,500,000 

United States Steel Corp 

. . 1901 

1,822,400,000 

Total 

. . 

$7,747,200,000 


* List selected from Bonbright and Means, The Bolding Company, p. 77. Grose 
assets obtained from Moody* x Industrials, 1936. 
t 1933 figure. 



The Effect of the Antitrust Laws 229 

held together by some o£ the most fantastic ideas, all based 
on the fundamental notion that a corporation is an individual 
who can trade and exchange goods without control by the 
Government. 



CHAPTER X 


The Ritual of Corporate Reorganization 

In which is explained the dcx:trine of vicarious atonement 
through which the debts of an industrial organization are for- 
given. 

T he antitrust laws, which we have been discussing, 
were the platform from which industrial enterprise 
could be viewed as a collection of competing indi- 
viduals in times of development and prosperity. The ritual 
of corporate reorganization performs the same service for 
great enterprises in adversity. It is perhaps the most interest- 
ing of all our legal rituals from a ceremonial point of view, 
because it is the most complicated mystery of all. In the cele- 
bration of this ritual great law firms are able to maintain 
staffs and offices which give a magnificence to the legal pro- 
fession known at no other time or place. The fees charged 
have been fantastic. The literature has been almost incom- 
prehensible, but the result reached has been most impressive. 
A corporate reorganization is a combination of a municipal 
election, a historical pageant, an antivice crusade, a graduate- 
school seminar, a judicial proceeding, and a series of horse 
trades, all rolled into one — thoroughly buttered with learn- 
ing and frosted with distinguished names. Here the union 
of law and economics is celebrated by one of the wildest 
ideological orgies in intellectual history. Men work all night 
preparing endless documents in answer to other endless docu- 
ments, which other men read in order to make solemn argu- 
ments. At the same time practical politicians utilize every 
resource of patronage, demagoguery, and coercion beneath 
the solemn smoke screen. 



The Ritual of Corporate Reorganization 231 

The purpose of all this is (i) to prove that when corpora- 
tions cannot pay their debts they must surrender all their 
property to their creditors like other individuals, thus vin- 
dicating inexorable economic law; (2) to permit a practical 
treatment of a political situation without violating this folk- 
lore. The practical methods are clearly those by which a po- 
litical machine maintains itself in power against opposition. 

Although to the casual observer the complications seem 
most forbidding, actually the dialectic of this process is very 
simple. It consists in the endless repetition in different forms 
of the notion that men must pay their debts, in a situation 
in which neither men nor debts in any real sense are involved. 

In order to understand this it is necessary to analyze the 
creed of the relationship of debtor and creditor in a society 
of fairly self-sufficient individuals, which has been gradually 
transferred to the relationship of great organizations to each 
other and to their retainers and subjects. The original picture 
of debt was that a thing had been loaned as a horse is loaned. 
If a man borrows another’s horse and kills it by wanton mis- 
use, he should be punished severely. On this analogy men 
who did not pay their debts were put in jail. The notion per- 
sisted long after it became apparent that jailing a man for 
debt was a cruel and useless thing to do, and that it ham- 
pered, instead of encouraged, trade. It put hazards on the 
taking of credit risks which strangled expansion. Neverthe- 
less, long after it had become an economic absurdity, im- 
prisonment for debt continued as a moral lesson. 

Gradually, however, it became harder to put men in jail 
for debt. The notion that a debt was a thing which the de- 
faulting debtor had wantonly destroyed gave way to the idea 
of the creditor making an “investment.” “Risk” and “invest- 
ment” are words which go together and when men began 
thinking of debt in terms of risk, they were willing to let the 
creditor suffer in an individualistic world for his bad judg- 



232 T he Folklore of Capitalism 

ment. The moral responsibility is thus not entirely on the 
debtor. The old moral lesson, that of the debtor’s culpability, 
is now dramatized by the fact that men can theoretically be 
put in jail in most states for debts fraudulently contracted. 
Fraud, however, is a difficult thing to define in the ethics of 
trading, which are essentially the ethics of deceiving the other 
side. Therefore, in this country today it has become prac- 
tically impossible actually to keep a man in jail for any other 
kind of debt than alimony, to which the ideology of an in- 
vestment risk had never been attached. Marriage is not the 
sort of tiling in which the bride is supposed to consult her 
banker, nor is she supposed to be punished for lack of judg- 
ment if she makes an obvious mistake. 

The little picture of debt as an investment in which the 
creditor must use good judgment carries with it the notion 
that the creditor has the right to make himself “secure” by 
relying on the value of the property which the debtor pos- 
sesses. This in turn involves the corollary idea that the credi- 
tor can take whatever property the debtor has. To this ide- 
ology legal procedure gradually conformed; levy of execution 
took the place of punishment. Where a debtor did not have 
enough property to go round, there grew up rules of a war 
to get that property. In this game the underlying folklore of 
an individualistic society insisted that “natural justice” give 
the prize to the swiftest creditor. This caused the develop- 
ment of elaborate legal formulas to determine symbolically 
which creditor really was first in getting the “property.” The 
writer recalls a lawsuit in which his client was engaged in a 
race between creditors to “attach” railroad ties which had 
been cut and were scattered about the woods. They had to 
be reduced to “possession” in order to give his client a prior 
attachment. Metaphysical questions as to what was “posses- 
sion” were argumentative weapons. Must the sheriff post a 
notice on each pile of tics or would a scries of notices tacked 



The Ritual of Corporate Reorganization 233 

on trees near the pile o£ ties be sufificient? Or was it necessary 
to go to the expense o£ gathering up the ties and putting a 
padlock on a £ence enclosing them? Law schools taught 
courses on the nature o£ possession. Words like “constructive 
possession” were invented to plug ideological holes. It was 
all done to celebrate the great individualistic principle that 
tire early bird catches the worm. This metaphysics, while 
complicated, was still manageable because the things which 
were attached were concrete and there were actual living in- 
dividuals who could be classified as debtors and as creditors. 

The ceremony dramatized two important ideals : first, that 
the race was to the swift; and, second, that a man who could 
not pay his debts must surrender his property and start all 
over again. Another little picture complicated the drama — 
the ideal of bankruptcy. This ideal represented the pacifist 
notion that creditors should not have to fight each other and 
that an equal division of property was preferable. It also in- 
volved the humanitarian idea that a debtor who had sur- 
rendered all his property had sufficiently atoned for his sins 
to be allowed to start over again. Therefore, debtors were 
“discharged in bankruptcy.” There was, of course, a spiritual 
conflict present in this ideal of bankruptcy. The “honest” 
man (whose disappearance has been commented on by the 
prophets of each successive generation) was not supposed to 
take advantage of the bankruptcy laws. The occasional mer- 
chant who worked all his life for creditors was given a halo 
for his suffering. 

This conflict was represented in the law by the fact that 
both the bankruptcy game and the creditors’-race game ex- 
isted side by side. Complicated rules were involved to deter- 
mine when the creditors’ race stopped and the bankruptcy 
game began. A great literature arose to define where the bor- 
der line was. 

When the large organizations, wearing the garments of 



234 ^ FolI{lore of Capitalism 

rugged individuals, replaced actual individuals, the conflict 
of the ideals and the political practical techniques of organi- 
zation created the law of corporate reorganization. This 
game became a good deal like three-dimensional chess. In 
the old game, at least, the words ‘"individual” and “property” 
described some of the pieces which were moved about on the 
chessboard. With the rise of great organizations, both of 
these terms became ceremonies. The property of a railroad 
doesn’t exist in the old sense of property because it cannot 
be bought and sold as a tangible thing. Its value is inseparable 
from the habits and disciplines and morale of the organiza- 
tion which operates the railroad. Since “property” meant 
anything with a money value, it became necessary to put a 
money value upon the habits and disciplines of organizations 
and to call them property. 

Therefore, such things as “going-concern value” and “good 
will” had to be called property and given a money value. The 
money value of these things, like the money value of all prop- 
erty belonging to individuals, was supposed to be determined 
by the laws of supply and demand. 

This worked beautifully as a slogan to keep the Govern- 
ment from stepping into the situation, since all sound men 
agreed that bureaucracy cannot try to change the laws of 
supply and demand. (They proved this by such examples as 
the experience of Brazil with coffee and the failure of at- 
tempts to control the world market in sugar. It was also fre- 
quently pointed out that governmental price-fixing caused 
the fall of the Roman Empire.) However, these notions did 
not work so well when it came to “selling” the “property” of 
a large corporate individual to settle its debts. There was no 
demand. This was explained on the theory that no individ- 
ual, corporate or otherwise, had enough “money” to “buy” a 
railroad, or an enterprise like Paramount Publix, which con- 
trolled about a third of the amusement industry of America. 



The Ritual of Corporate Reorganization 235 

The real reason was that since the “property” consisted in 
the unity and coherence of an organization, only organiza- 
tion itself could “buy” it. The organization itself was the 
only “property” which the organization “owned.” The no- 
tion of buying this sort of property in the open market was 
as unreal as it would be for the Republican party in New 
York to “buy” the very successful Vare machine in Phila- 
delphia so that they could beat Tammany Hall, and to fix 
the price of the Vare machine by capitalizing its earning ca- 
pacity. 

Of course, in reality the struggle which attended the “in- 
solvency” of a great organization could be nothing other than 
a struggle for political control of that organization. The sym- 
bols were debts and credits and sales, and men had to plan 
their practical campaigns in those terms. This created a situa- 
tion in which the rules of debts and credits became like the 
platforms in a political campaign. They didn’t mean any- 
thing. They were full of contradictions. They could never 
be successfully followed if political considerations dictated 
otherwise, and yet they were supposed to be followed to the 
logical end even if it meant loss of the battle. The conflict 
could only be resolved by a public drama where the rules pa- 
raded in dress clothes, while a political machine directed the 
play from behind the scenes. 

The central idea in that drama was the personification of 
industrial enterprise as individuals who must pay their debts 
or else atone for not paying by giving up all their property 
and starting over again. The verbal currency was taken from 
the old sale on execution, but of course the words had to ac- 
quire new meanings while seeming to keep the old. It was 
done in this way: A friendly creditor, representing all the 
creditors, sued the corporate individual. Instead of levying 
execution on its property, he crossed an imaginary line into 
a court of equity (which was supposed to possess principles 



236 T he Folklore of Capitalism 

which relieved litigants from the harsh logic of the law). 
Once across this line, he told the judge that if the property 
were “sold” at public sale the creditors would all suffer, be- 
cause the sale would destroy the going-concern value, which 
was an important “asset.” He therefore asked that a receiver 
be appointed to hold the property together as an operating 
unit, while the creditor hunted for purchasers. A purchaser 
would finally appear and buy the property. The corporation 
would then be stripped of everything it had and cast into 
outer darkness as a lesson to other corporations not to incur 
debts which they could not pay. Thus the vicarious atone- 
ment for the sin of getting into debt was accomplished. 

Actually, however, no one could operate the property but 
the organization. Hence a political combination, composed 
of the winners in the struggle for control, took over the man- 
agement by calling itself the purchaser. 

The creditors were divided into all sorts of classes. Some 
were secured and others unsecured. There were always con- 
flicting claims on securities, but the first in time was sup- 
posed to have the preference. There were also a lot of dif- 
ferent kinds of stockholders, who had different kinds of 
preferences, but none of whom were supposed to get any- 
thing until the creditors had been paid. Matters in this area 
became very complicated indeed, because lawyers would try 
to draw up elaborate instruments which would give the 
rights of both creditors and stockholders to the persons they 
represented. However, the central little picture of a hierarchy 
of claims, sharply divided into two great classes, creditors 
and stockholders, was very clear and simple. 

This process was called an “equity receivership.” It ob- 
tained the same results as bankruptcy, so far as the division 
of the “assets” equally among creditors was concerned, by 
using the imagery of a philanthropic creditor selling the prop- 
erty, not only for his own benefit, but for the benefit of all. 



The Ritual of Corporate Reorganization 'lyj 

“Throwing” the corporation into bankruptcy was a little 
different from an equity receivership, though it is impossible 
to say exactly where the difference lay. Lawyers, however, 
felt that the equity receivership was a little better because 
they themselves had invented all the rules in this procedure, 
and they were not bothered by the legislature as in bank- 
ruptcy. Hence the equity receivership was preferred, but if 
a student wanted to ask a lawyer just why, he got no such 
simple explanation. Instead he was referred to a large num- 
ber of books. The subject was simply too colossal to be talked 
about simply. That would be like trying to reduce military 
strategy to a formula. Both bankruptcy and equity had their 
advantages in different kinds of tactical situations. Each 
dramatized the same ideal — the atonement of the corporate 
individual for its failure to pay debts by stripping it of its 
insignia and casting it into outer darkness. 

All of this drama was played before the court. It was like 
a Chinese play, in that it was endless, and very highly styl- 
ized. No one was permitted to talk naturally about the facts 
of financial life and politics on the stage. 

Behind the scenes a different game went on. Here men 
realized that it was a question, not of sale, but of obtaining 
control. Those already in control had an enormous advan- 
tage. Symbolically, the stockholders were below the creditors. 
Actually, the management, who usually controlled the stock, 
could no more be ousted than the head of a political machine 
can be ousted. The scene became one in which different con- 
flicting interests traded and negotiated for strategic position 
within the enterprise, much as rival military cliques might 
struggle for the control of an army. The secured bondholders 
had the advantage of rank. The natural-born leaders who 
gathered the private soldiers together had the advantage of 
power. It therefore often happened that the stockholders, 
who were usually on the side of the former management, got 



238 T he Folklore of Capitalism 

a position because of their strategic advantage which a logical 
application of the principles of debt did not give them. At- 
tempts to reconcile this with the theology that “secured bonds 
must be paid first” resulted in the utmost confusion. No one 
ever knew how the “law” stood on any of the points about 
which the conflict raged. 

The battle behind the judicial scenes was further com- 
plicated because it had its own symbols, which were not those 
of a large individual selling another large individual’s prop- 
erty on execution, but those of democratic government, in 
which the majority was supposed to rule. Thus a majority of 
the shares was supposed to control the management. The 
power of the majority of the bondholders was more compli- 
cated. It could not legally control the minority (as in the case 
of shareholders) because bondholders were supposed to have 
separate independent claims which could not be taken away 
by a majority. However, another device made of these bond- 
holders a sort of democracy with a very limited suffrage. The 
security was generally held by a corporate trustee who “repre- 
sented” the bondholders. Actually, as the investigations of 
the Securities and Exchange Commission showed, the cor- 
porate trustee assumed practically no responsibility.^ The 
written documents which were his authority were mostly 
composed of clauses relieving him from all liability so long 
as he did not do anything. There was much criticism because 
the duties of the corporate trustee for bondholders were 
purely formal. However, this fact was actually not surpris- 
ing since the only purpose of this trustee was to personify the 
bondholders, and thus to allow the courts to think of them 
as a single character in the play, instead of a mob. Within the 
symbolic bondholder personality represented by the corpo- 

1 Report on the Study and Investigation of the WorJ^, Activities, Person^ 
nel and Functions of Protective and Reorganization Committees, Part VT, 
“Trustees under Indentures.” 



T he Ritual of Corporate Reorganization 239 

rate trustee, the symbols of democracy again were supposed to 
govern to a limited extent. But it took a very large majority 
instead of a bare majority of secured bondholders to compel 
the trustee to act. The proportion depended on the “trust in- 
denture” by which the trustee received his title. The courts 
worried somewhat as to how large a majority would be legal 
and equitable for such an instrument to require. They never 
came to any very definite conclusion on this, however. 

And thus the whole phenomenon was very complex. It 
started as a drama of an execution sale. Then if you looked 
at it long enough it became a democracy, with a constitution. 
You never could tell with any certainty in which role it was 
appearing because the players always took different sides on 
this question. After you were acclimated to this, however, 
you discovered that it was actually a sub rosa political ma- 
chine using patronage, demagogic appeals, and all the favor- 
ite devices of such machines to influence and control the vast 
unorganized mass of individual creditors. 

The techniques used were the same as those of any political 
organization. The various parties did not call themselves po- 
litical machines, but used the words “protective committee.” 
Numerous “protective committees” were formed which com- 
peted for favor among the creditors by advertising, making 
speeches, and sending out campaign literature. As is usual in 
political campaigns, the “ins” had the advantage of the “outs” 
because they controlled the political machinery. Therefore, an 
alliance between bankers and management would nearly al- 
ways be successful. The banking group had the lists of credi- 
tors and the prestige. The management had the experience. 
This made the appeal of other protective committees doubly 
difficult.^ In the first place, they did not have the same control 

2 “By and large, control over committees has been in the hands of the 
management and the bankers. Their feeling has been and is that the com- 
mittee field is their preserve and that outside interests (at least those whom 



240 T he Fol\lore of Capitalism 

of the means of communication to the creditors. The situa- 
tion might be compared to one where a political party in 
power controlled the press and the radio. In the second place, 
the bankers’ protective committee was composed of men who 
were regarded as solid and substantial citizens, thus making 
the other groups appear as radicals. (The term actually used 
was “strikers.”) Yet the “outs” usually got some reward for 
their energy.® 

The “outs” in conducting the campaign used the identical 
symbols as in a national election couched in financial terms. 
In doing this they followed the inescapable principles of 
all public debate. Thus, they always charged the “ins” 

the bankers do not sponsor or approve) have no just cause for ‘poaching’ 
on it. This has been conspicuously true of the bankers, who, to a great ex- 
tent, have been the spokesmen and strategists for the management in re- 
organizations,” {Idfm, Part I, “Strategy and Techniques of Protective and 
Reorganization Committees,” p. 342.) 

® “Such powerful outside interests [like that of Wallace Groves in Cclo- 
tex] have had no previous connection with the company. They merely 
seize upon the chaos of reorganization for the purpose of entering and tak- 
ing possession of the company. In some respects, they arc like the striker- 
lawyer who similarly is devoid of financial stake or previous economic 
interest in the company. But they differ significantly in composition, re- 
sources, tactics, and generally in objeaives. The outside banking groups 
have money, power, and prestige which the usual striker cannot command. 
Their objectives are usually not the comparatively insignificant profits which 
a striker gets by way of fees for services or as a settlement. The outside 
banking groups are generally willing, if advisable, to sacrifice such trifles. 
They arc seeking control of the corporation and the possibilities of the great 
power and profits which control entails. And for this reason, as well as 
because of their prestige, position, and superior resources, they use weapons 
other than the threats and suits of the striker. They resort to the market 
place. They buy up strategic claims and securities, and with these in their 
possession, they gain control of the company. Sometimes, for the purpose 
of strengthening their own position, they will form a protective committee 
and solicit the support of security holders; sometimes they will work with- 
out a committee.” (Id(Tm, Part I, “Strategy and Techniques of Protective 
and Rcorgaiiization Committees,” p, 757*) 



The Ritual of Corporate Reorganization 241 

with corruption,^ dominance by selfish financial interest, ex- 
travagance, failure to balance the budget, use of public funds 
for their own political advancement, and failure to protect 
the interests of the “small** investor. (Both parties always 
expressed intense concern for the “little fellow.**) The “ins** 
always charged the “outs’* with being radicals, advancing 
“unsound** schemes, and following unsound economic the- 
ory. They pointed with pride to their past record as financial 
governors. 

The “ins** usually won, but not always. Sometimes the elec- 
tions resulted in divided control. However, after the election 
was over the politicians stopped calling each other names and 
the new administration was accepted. The voter had about 
the same knowledge of what was going on as in the ordinary 
municipal election. 

An example of this kind of political fight is found in the 
famous Kreuger-Toll reorganization.® In this fantastic story 
of American finance, Kreuger, one of the most brilliant 
swindlers of history, had succeeded in extracting colossal 
sums of money from honest but gullible American bankers 
of the highest prestige and standing. When the crash came a 
vast army of investors who had entrusted their savings to the 
advice of these bankers found itself subjected to an involun- 
tary capital levy. Had the United States Government sub- 
jected its citizens to such a levy there would have been a na- 
tional scandal which would have wrecked the party in 
power. The symbolism of our industrial feudalism deflects 
that indignation where the levy is made by some financial 
principality. The financial corporation is an individual who 

^Idem, Section III, “Outside Groups and Their Techniques,** Part I, 
“Strategy and Techniques of Protective and Reorganization Committees.” 

^Idem, Part I, pp. 237-240, 777-79ii 809-837. 



242 T he Folklore of Capitalism 

has unfortunately gone wrong, not an organization which 
we desire to control. 

There followed the formation of a protective committee 
by the bankers who had sold the securities. They were actu- 
ated by the highest motives. No ruler desires to lose power 
because he has made mistakes. He wants to continue to rule 
because he naturally feels that he has been endowed with 
gifts in that direction not given to ordinary men. Sometimes 
this conclusion is justified; sometimes not. The trouble with 
such groups in industry is not lack of ability but their refusal 
to recognize that the organization has a public purpose. In 
any event, the bankers assumed control because they felt it 
was their duty. 

In the Kreuger-Toll reorganization the scandal had been 
so notorious that the ground was ready for the formation of 
an opposing party.® This party represented what in politics 

^ A committee was formed headed by Bainbridgc Colby and represented 
by Samuel Untermyer to oust the bankers of control. The cfTcct of this 
committee was described by the Securities and Exchange Commission as 
follows: 

“These attacks had a pronounced cfTcct. One of their results was to 
evoke a public response from the Murphy committee denying that deposit 
with it would involve loss of ‘personal claims,’ and announcing an amend- 
ment to its deposit agreement ‘clarifying’ this point. The 0)lby committee 
retaliated with a circular again calling attention to the importance of re- 
taining rescission rights, and asserting that neither the original nor the 
amended deposit agreement of the Murphy committee preserved these 
rights. Continuing in bold-facc type, the circular declared that the bankers’ 
committee had attempted to preserve these rights: 

“ '• • • in a manner, however, which in the opinion of our Counsel is 
wholly inadequate and insufficient for that purpose. The very fact that they 
have made this eleventh-hour (though inadequate) amendment is in effect 
a confession of their failure to safeguard your rights.’ 

“Even Colonel Murphy admitted the effectiveness of the publicity of Mr. 
Untermyer: 

“ *• • • Now, we were terribly hampered in what we were trying to do, 
and owing to the fact that anyone as vocal as Mr. Untermyer was against 
us. He changed a large amount of public opinion on account of command- 
ing a large amount of publicity, and he is very able, and when we tried to 



The Ritual of Corporate Reorganization 243 

would be called the liberals. It was opposed to banker con- 
trol, in the same way that the West is opposed to Wall Street. 
It was fully as idealistic in its purposes and intent as the more 
conservative group. It included in its membership university 
professors and high-minded lawyers. It retained Samuel Un- 
termyer as its counsel and started the political fight to get the 
investors to send their securities to it, instead of to the other 
committee. It should be said in passing for the benefit of the 
layman that such a campaign required funds. Such funds 
were, of course, provided by an agreement on the part of the 
security-holders who sent their bonds to the committee that 
the bonds could be used to pay for all expenses of the com- 
mittee. This is called a deposit agreement and a court finally 
passes on the fairness of the charges. 

This particular campaign was bitter.*^ All sorts of charges 

do anything with the court for instance, to get an American trustee in 
bankruptcy appointed, and when we tried to get a Swedish liquidator 
appointed and Mr. Untermyer opposed, these people were afraid to act, be- 
cause they didn’t know who on earth was qualified to speak for the se- 
curities.’ ” {Idem, Part I, “Strategy and Techniques of Protective and Re- 
organization Committees,” p. 783.) 

^ Mr. Dulles, attorney for the bankers* committee, testified as follows: 

“Everything was being grabbed by everybody else, and because Mr. Un- 
termyer and I had gotten into a state where anything he wanted to do I 
opposed in principle, and everything I wanted to do he opposed in prin- 
ciple. There was just absolute inaction throughout the whole Kreugcr & 
Toll side of the picture. We couldn’t get a trustee in bankruptcy that we 
could agree on, we couldn’t get a successor trustee, we couldn’t get repre- 
sentation on the board of liquidators, we couldn’t get enough deposits of 
bonds from any one quarter so that there would be sufficient credit or in- 
terest to speak with authority, and the whole situation was being sacri- 
ficed to a personal — what had become more or less a personal feud be- 
tween Mr. Untermyer and myself, and I felt very strongly that the duty 
which I owed to my clients overrode any personal considerations of trying 
to have a fight with Mr. Untermyer and defeat him as a matter of per- 
sonal prestige, and in doing that sacrifice the duty which I owed to my 
clients, and tlicre was only one solution for it, and that was to come to co- 
operate with Mr. Untermyer and get the situation cleared up.” {Idem^ 
Part I, “Strategy and Techniques of Protective and Reorganization Commit- 
tees,” pp. 812-813.) 



?44 ^ Folklore of Capitalism 

were made by the liberal committee. However, not being in 
possession of the lists of security-holders, and not having the 
financial prestige of the conservative group, tliey were able 
to get hold of only one fourth as many bonds as were de- 
posited with the conservative party. They did not, however, 
entirely lose the election. Such was the strength and violence 
of their charges that they were given a share in the manage- 
ment of the reorganization. The firm of Sullivan and Crom- 
well, consisting of about sixty lawyers, agreed to consult with 
Mr. Untermyer’s large firm. Fees were charged by everyone. 

After the coalition it was noticeable that the charges and 
countercharges suddenly ended. Mr. Untermyer developed 
the greatest respect for the firm of Sullivan and Cromwell, 
which the firm reciprocated, as was evidenced by their testi- 
mony at the investigation conducted in 1935 by the Securities 
and Exchange Commission. At first Mr. Untermyer’s posi- 
tion was that the other side needed watching. After the com- 
promise the necessity for his services was occasioned not by 
any need for supervision but because of the magnitude of the 
task and the superior character of Mr. Untermyer’s qualifica- 
tions, which, added to those of Sullivan and Cromwell, made 
an almost perfect combination.® 

® Mr. Dulles testified; 

“Q. Did you agree that in considering the amount of the fee, which Mr. 
Untermyer would be entitled to, the insignificance of the Colby deposits 
as compared with the Murphy deposits, would not be considered? 

“A. No. It would perhaps be helpful if I added to that statement this: 
That it was implicit in our arrangement to cooperate, that we would not 
throughout these proceedings take the position that because we had alone 
sixty percent of the bonds, and they had a small amount of the bonds, we 
would take the position that wc were to dominate the situation. 


“Q. Well, now, when you speak of the value of their work, you were 
thinking in terms of the respective fees diat might be accruing to counsel 
to the Colby committee were you not? 

“A. No, not in terms of fees. I was thinking in terms of where there 



The Ritual of Corporate Reorganization 245 

There was probably nothing hypocritical in this change of 
front. It was the normal reaction of people engaged in a po- 
litical campaign to picture the other side as corrupt, wrong 
headed, impractical, and without thought for the “little fel- 
low.*’ It was also quite normal to have these same people 
work in harmony when the political strife was ended. How- 
ever, no more wasteful way of distributing the assets of a cor- 
poration can possibly be imagined, than conducting a long 
and expensive fight over who is to distribute them. Never- 
theless, the situation under our present industrial feudalism 
makes such a fight unavoidable. There is not the slightest 
sense in blaming anyone. 

Wc will not confuse our description here by throwing a 
scheme for reform into the discussion, because such situa- 
tions do not lend themselves to sudden reforms. We will 
only point out that if we think of the situation in terms of 
organization, rather than in terms of money and laissez fatre, 
we may be able to come to some sensible conclusion; if we 
think of it in terms of a free fiscal economy which emphasizes 
the benefits of a competitive struggle for money as the best 

was work to be done, and work which could competently be done in this 
situation by Mr. Untermyer or Mr. Hartman, that they would not be ex- 
cluded from the doing of that work merely because we would say that wc 
have forty times as much bonds as you have. 

“Q. Tliere was a gendeman’s understanding that just by reason of the 
fact that the Colby committee had a relatively small amount of bonds on 
deposit, Mr. Untermyer and Mr. Hartman would not be precluded from 
any legal retainers that might arise in connection with this situation? 

“A. Assuming that they were qualified to do the work. In other words, 
Mr. Hartman, as I recall, said to me: *If we do cooperate, it will end up by 
your getting all of the bonds and we won’t have any. Now, it isn’t a fair 
basis of cooperation for you to turn around and then say because you have 
got all of the bonds, therefore you arc cndtlcd to dominate the whole situa- 
tion to die exclusion of us. It is our cooperadon that will have brought 
about that situation, and therefore it should not be capitalized against us.* ** 
(Idem, Part 1 , “Strategy and Techniques of Protcedve and Rcorganizadon 
Committees,’’ pp, 825-826.) 



246 T he Foll^ore of Capitalism 

principle, no sensible solution is possible. All changes will 
be aimed at making the system conform to its ideals. Thus 
the reforms will not be a change of organization methods 
but a moral reform. We have pointed out as the principle of 
political dynamics that moral crusades are simply methods 
of adhering to ancient practices, and, at the same time, of 
resolving the spiritual conflict which we feel because we ad- 
here to them in the face of practical needs which these prac- 
tices do not meet. 

The issues in the thousands of fights for control of these 
great organizations are as numerous as in a series of munici- 
pal elections. The organizations are built up by patronage, 
money, loyalties, desire for prestige, ambition to do a cred- 
itable, workmanlike job. In an interesting book, The Investor 
Pays,^ Max Lowenthal describes the reorganization of the 
Milwaukee Railroad. The book is illuminating on the tech- 
niques used. However, it is written with a strong undercur- 
rent of moral indignation which one who takes an objective 
point of view cannot share. It is difficult to see how the thing 
could be done otherwise so long as corporations arc regarded 
as individuals without public responsibility, instead of as an 
integral part of our government. There arc likely to be many 
attempts to reform, but no real change until the general folk- 
lore on this subject changes. 

The ethics of the group controlling reorganizations were 
no better or worse than the ethics of our great municipal 
machines, like Tammany Hall. Contrary to popular my- 
thology, political machines, both financial and municipal, 
contain a very large number of unselfish and highly moral 
people. They are thrown into a situation, however, in which 
the penalty of not fighting fire with fire is often failure. Since 
the advantage is to those who step over the border line of 


® A. A. Knopf, 1933. 



The Ritual of Corporate Reorganization 247 

what is called ethical conduct, the picture presented by an 
investigation (such as that conducted under Commissioner 
W. O. Douglas of the Securities and Exchange Commission) 
is always shocking. 

We will illustrate this by a typical paragraph or two from 
the Securities and Exchange Commission’s report, Part III, 
“Committees for the Holders of Real Estate Bonds.”^^ 

4. Use of the Slogan: “ Years Without 

Loss TO Any Investor.” 

For a decade all the wiles of advertising, all the arts and ex- 
hortations of salesmanship, had been directed to and had suc- 
ceeded in identifying real estate bond issues in the minds of in- 
vestors solely by the underwriters concerned. A bond was judged 
as a “Straus” issue, not as the obligation of the particular indi- 
vidual or corporation liable upon it. So, if a “Straus” issue was 
considered a sound investment, it was not primarily for the pos- 
sible reason that conservative appraisal of values had come to be 
the rule in all Straus underwritings. Though the various factors 
necessary for sound analysis of securities were sometimes given, 
their assertion had minor significance in the sale of these securi- 
ties. Their truth or falsity was unimportant; it did not matter 
that a stated appraisal reflected a wish-fulfillment instead of 
sound judgment. The bonds sold because the investor had been 
taught that the name “Straus” connoted securities from a distrib- 
uting source whose clients had suffered no loss in forty years or 
more. The underwriter’s name and its attendant slogan were the 
distinguishing marks of the real estate bond. Little else counted. 

This was a theme with many variations. It was used in the 
form stated by S. W. Straus & Co.; it had its counterparts among 
the other real estate bond houses of issue. Greenebaum Sons’ In- 
vestment Co., for example, utilized: “Greenebaum Bonds — loo 
Percent Safe Since 1855”; “69 Years’ Proven Safety.” . . . 

Investors suffered no loss because interest and principal pay- 


i®pp. 70 - 7 L 72-73» 85, 86, I52~i53» 198. 



248 T he Folklore of Capitalism 

mcnts due on bonds would be met, as we have already related, 
from the pockets of the underwriters if mortgagors defaulted. 
As a corollary the underwriter concealed the occurrence of de- 
fault. . . 

• • • • « 

This indefensible practice, most highly developed by under- 
writers of real estate investments, supplies the key to an un- 
derstanding of the activities in the years 1926-1931 which led 
ultimately to their collapse. . . 

7. Protection of the House of Issue by the Committee 

The customary justification asserted by houses of issue in the 
hearings before this Commission for their formation of protec- 
tive committees was their feeling of “responsibility” to the hold- 
ers of the securities which they had underwritten and sold. . . 


On the other hand, control of the committee — whether exerted 
by placing members of the house of issue directly on the com- 
mittee or by insuring the selection of men acceptable to the house 
of issue — means control over the version of the situation pre- 
sented to the bondholders through committee circulars, adver- 
tisements and answers to inquiries. It also means, as more fully 
developed in the ensuing sections, that if a friendly and coopera- 
tive plan of reorganization were worked out, the true facts as to 
the value of the property and the relation of the houses of issue 
to it could be kept permanently in their possession and not 
brought to light. It also means that there will not be a thorough 
investigation of possible causes of action against the houses of 
issue nor will there be litigation by the committees against them. 

In this manner the houses of issue will minimize the risk of 
their own liability to bondholders. In this manner they will also 
“save face.” Through their mouthpiece — the protective commit- 
tee — they can minimize the seriousness of the situation. They can 
blame mortgagors, depressions, and business cycles. They can di- 



The Ritual of Corporate Reorganization 249 

vert criticism to those causes. They can perhaps completely pre- 
vent the searching light of publicity being cast on their own mis- 
deeds. . . 

Control over a reorganization means, as we have indicated, 
control over a large amount of business patronage. Much of this 
patronage can be reserved for those in control or may be dis- 
pensed to their affiliated interests, as they desire. Much of it can 
be dispensed as the occasion may require, in order to afford pro- 
tection from desired quarters or favor where good will may be 
needed. 


I, S. W. Straus & Co. 

The clearest example in point is the system set up by S. W. 
Straus & Co., whereby it dominated the reorganization of the 
numerous bond issues which it had sold. From its position of 
dominance Straus distributed the business patronage to itself and 
its affiliated interests. In reorganization the bond trustee and the 
protective committee are the two principal distributors of this 
lucrative patronage. ... In effect the Straus organization dur- 
ing this period was engaged in the business of reorganizing these 
properties. 

S. J. T. Straus testified before this Commission: 

Q. Is there any function connected with reorganization which 
Straus did not perform at one time or another in connection 
with one issue or another? Can you think of any single function 
which Straus did not perform? 

A. At a certain stage of the reorganization, that is true. 


One common form of reorganization results in a new corpora- 
tion owning and operating the property. Quite commonly its 
stock, instead of being distributed directly to the former bond- 
holders, is held in a voting trust. With like conformity in such 
cases, it will be the committee which designates the voting trus- 
tees. And almost invariably one or more of the committee mem- 
bers will be among the voting trustees who arc chosen. Thus it 



250 T he Folklore of Capitalism 

is that committees may perpetuate their control over the proper- 
ties even after the reorganization job appears to be done. An- 
other common form of reorganization results in title to the prop- 
erty being acquired by trustees under a liquidation trust, certifi- 
cates of beneficial interest being issued to the old security holders 
and the liquidation trustees having full power of management 
and control. This is an adaptation of the older Massachusetts 
“business trust.” Here again committee members or their affili- 
ated interests will be found among the liquidating trustees. 

Results of this kind are as commonplace in our industrial 
structure as the sub rosa activities of political machines are 
commonplace in our political structure. They follow an in- 
evitable law of political dynamics. Given a situation where 
the ideals are in contradiction to the needs, a sub rosa or- 
ganization must develop. That organization gets the job 
done after a fashion, but only with an accompanying moral 
war to justify the ideals. The result is confusion of purpose 
and inefficiency. It is inevitable so long as the ideals and the 
needs are in complete conflict. 

In such a situation the public shuts its eyes to violations 
of its ethics with the same unconscious response which makes 
the individual ignore the so-called “lower side” of his own 
nature in public. Thus it was that the disclosures of the pro- 
tective-committee study which we have quoted were given 
little publicity. People simply did not want to think of them. 
They insulated themselves against what was under their 
noses by means of the symbols of fiscal theory. Their rea- 
soning was very simple: 

1. These results are unusual because economic theory 
teaches us that “credit” can be obtained only by fair dealing. 

2. It was the fault of the investors that they lost their 
money. They have learned a valuable lesson and will not do 
it again because in a capitalistic system nearly everyone fol- 
lows his enlightened self-interest. 



The Ritual of Corporate Reorganization 251 

3. If the investors are caught again they will deserve it 
again. 

4. A recognition of the public responsibility of a great 
organization to provide security to its retainers and distribute 
goods would be Communism. 

5. Our financial organizations are not an industrial or 
temporal government but individuals, and to control them 
is to invite a dictatorship. 

6. Industrial organizations are not themselves dictator- 
ships because they are individuals exercising their own free 
will. 

7. All sound learning tells us this is the best way to run a 
financial government. 

And so the slogans run which protect the dreamworld of 
fiscal thinking from the actual world of social conduct. 

We have said that the general ethics of industrial organi- 
zation are no worse than those of the political organization. 
This is true, but the takings of the industrial politician are 
very much greater. Such financial rewards, however, are not 
regarded as graft, so there is no need for concealment. Fur- 
ther than that, there is a settled belief that the money ex- 
tracted from the public “belongs” to the organization and it 
is therefore no business of the public what becomes of it. 
The great financial rewards of our industrial world have 
come to financiers as a charge on production and manage- 
ment for assistance in using financial symbols. 

For example, David Schenker, examining Wallie Groves 
in an investment trust study conducted by the Securities and 
Exchange Commission in 1936, showed how that individual 
had obtained control of a group of investment trusts, own- 
ing stock in all sorts of enterprises without any investment 
whatever. The method was a masterpiece of financial fiction. 
Groves sold the investment trust companies stock in corpora- 
tions which he himself dominated at a fictitious profit. He 



252 T he Volh}ore of Capitalism 

then used this profit to buy control of the investment trusts. 
The various devices by which those skilled in the manipula- 
tion of debts and credits obtained control are a fascinating 
study. In a very large area of American industrial life the 
control is not with those who arc conducting the business 
of production and distribution, but with those who are fi' 
nancing it. It is worthy of note to find that in the protective- 
committee study made by the Securities and Exchange Com- 
mission, few witnesses connected with the control of great 
organizations had anything to do with the actual production 
or distribution of their products. The great organizing work 
of industry today is done by bankers rather than manufac- 
turers. 

Modern problems of organization have mostly consisted 
in the coordination of already existing productive plants 
into larger units. This has involved two elements: 

1. The development of new techniques. 

2. The reconciliation of these new organizations with 
popular mythology. 

It is the second clement that has claimed all the rewards 
because it is the priestly function, and priests always have a 
prestige superior to practical men. The burden of this priest- 
hood is illustrated in the following summary of the fees 
charged in the reorganization of Paramount Publix, de- 
scribed rather objectively in the Neto Yorker of August 3, 
1935 - 

A REPORTER AT LARGE 

Boy, Go Out and Get Me a Shingle 

Last week, fuller of zeal than of sound common sense, we threw 
ourself into the face of the legal profession. Nothing happened. 
It was like throwing ourself at a featherbed. Not bruised, though 
slightly beaded up, we arc just where we started, but it must be 
confessed that we have a new and slightly reverent admiration 



T he Ritual of Corporate Reorganization 253 

for gentlemen who can resist all inquiries into their strange ways 
with so much frustrating, dignified politeness. 

Paramount Publix, which manufactured and distributed and 
exhibited motion pictures, went into receivership on January 
26th, 1933. Not so long before this, its issued securities had a 
market value of $200,000,000, but this lordly treasure had gone 
zingo with the depression, and creditors had reached the last 
notch of their patience. 

Lawyers got busy with the effort to reorganize the company: 
to let Paramount dramas continue their march across the screens 
of the land and to recover a little cash from the wreckage. They 
finally did effect their reorganization, with the setting up of an 
enterprise called Paramount Pictures, Inc. And one of their first 
chores was to place on the balance sheet of the new company, in 
the liabilities column, an item of $2,500,000, listing it as “unpaid 
expenses” in conjunction with the receivership. 

Now the bills against that item are in: not for $2,500,000 but 
for $3,650,000, which amount, say the gentlemen of the law, is 
only a reasonable compensation for their learned assistance. 

The bills came along in this fashion: Every lawyer who man- 
aged to get himself associated with the case decided what propor- 
tion of the $2,500,000 should rightly belong to him. He made out 
his claim, and filed it with the Federal Court. As I write now, the 
Court, in the person of Judge Alfred C. Coxe, has before it the 
question of the validity of these bills — whether they should be 
paid in full out of the earnings of the new corporation, whether 
they should be pared down, and whether some of them should 
be disallowed altogether. 

Some of the bills can be understood at once. At the outset of 
the receivership, there naturally had to be a trustee or a company 
of trustees, and so, after a hearing or so in Federal Court, Charles 
D. Hilles, Eugene W. Leake, and Charles E. Richardson were 
named for the job. No particular amount of pay was named at 
the time, but now the three gendemen say that, with expenses 
thrown in, they have earned, between them, $449,866. Of this 
amount, Mr. Hilles claims $180,000 — which pays him at the rate 



254 Folf(lore of Capitalism 

of approximately $6,200 a month for the time he served. He did 
not, of course, devote his whole time to the affairs of Paramount. 
This much he vouchsafed before a Congressional investigating 
committee last year. Mr. Leake and Mr. Richardson are more 
modest, saying that they have earned, respectively, only $150,433 
and $119,433 for their labors. 

Other items out of the handsome total do not explain them- 
selves so readily to the lay mind. We glance, for example, at the 
bill of Messrs. Bibb, Dederick & Osbourne, attorneys at law. It 
reads: “For acting as attorneys for the holder of a debenture bond 
of the debtor, who intervened in the involuntary proceedings and 
questioned the equity receivership and the voluntary bankruptcy 
proceedings — $25,000.” 

Also, there was formed a committee of people who held de- 
benture bonds. Mr. Frank A. Vanderlip was named the head of 
this committee and got down to work to protect its interests. He 
wants $50,000 for his work, and the other members of the com- 
mittee want, between them, $30,000 for their work. Dr. Julius 
Klein did some sort of labor for the committee, and asks $52,390 
in payment of compensation and expenses. The committee itself 
says that its necessary expenses (looking up things and going 
over matters with creditors, it is to be supposed — trips and what- 
not) amount to $90,863. But the committee could not work the 
thing out all by itself. It needed, of course, lawyers. So it hired 
on the firm of Davis, Polk, Wardwell, Gardiner & Reed. These 
distinguished counsellors want $150,000. 

Likewise: Mr. Peter Grimm, recently called in by Washington 
as special adviser to the Treasury Department on real-estate mat- 
ters, was the chairman of a committee representing certain hold- 
ers of debentures in the Paramount Broadway Corporation, a 
subsidiary. His committee wants $40,000 for salaries and $40,000 
for expenses. But once again the lawyers had to help. Messrs. 
Stroock & Stroock, who led the committee through its legal 
mazes, have put in a bill for $100,000 plus $57,000 for expenses. 

Now you sec what questions we began asking the lawyer 
gentlemen: How did these committees get going in the first 
place Did they just name themselves, saying “Let’s be a com- 



T he Ritual of Corporate Reorganization 255 

mittee/’ and start worrying over things, and employ lawyers to 
help them? Was anybody consulted before these big bills against 
the new corporation began to pile up? And should the new cor- 
poration — the stockholders of the new corporation — be expected 
to settle up? 

We suppose you see, also, what sort of answers we got. It 
was all something we couldn’t be expected to understand. Any- 
way, the case was in litigation, and it is not quite cricket for 
lawyers to talk about a case before it is decided. Ladies and 
gentlemen, for vagueness that is charming almost to wistfulness, 
we commend you to the profession of the law when its own fel- 
lows arc straining toward the money bags. We finally went to 
sec a lawyer friend and asked him about it. 

“I don’t know anything at all about the case,” he said, ‘‘but I 
can make some general explanations which might apply to any 
case of a similar sort.” That was further than we had got during 
three days of inquiry. 

“When a corporation has issued debentures,” he said, “and 
then goes bankrupt, it is to the interest of the debenture-holders to 
keep the business going, to try to set up a new corporation which 
can take over the assets and liabilities of the ruined one: dispose 
of the liabilities somehow or another, and start all over again. 

“It is better for the debenture-holders to form committees and 
pool the sum of their holdings, so that when they approach the 
trustees or the referee in bankruptcy, with proposals to the 
creditors, their combined interests will have more weight. Natu- 
rally, they need lawyers, and naturally they spend some money 
interviewing people like creditors and other stockholders.” 

Wc said, “Let’s take the two attorneys, Malcolm Sumner and 
former Judge Edwin Garvin. They represented a committee of 
three bondholders whose bonds were worth a total face value of 
$15,000. Now they put in a bill of $150,000 — apparently for their 
services in protecting this $15,000 investment. How about it?” 

“Sounds reasonable,” he said. “They automatically became 
petitioners for all the security-holders when they took on that 
committee of three.” 

“Reasonable?” wc asked. 



256 T he Folklore of Capitalism 

‘‘Sure,” he said. 

“O.K.,” we said, and left him. 

We looked up the Sumner-Garvin claim a little further. They 
set forth, in this claim, that they had, through their efforts, 
“wrested control of the corporation from Kuhn, Loeb & Co.” 
But they had nothing much to say concerning the desirability of 
wresting it from Kuhn, Loeb & Co. Anyway, Kuhn, Loeb & Co. 
have claimed $100,000 for their services — possibly in resisting the 
efforts of Sumner and Garvin. And Kuhn, Loeb’s lawyer men, 
not to be outdone by all the Sumners and Garvins of the world, 
demand $150,000 for their labors. Firm of Cravath, dc Gersdorff, 
Swaine & Wood. 

But the most intriguing episode of the entire business must 
have been on that day when the head man at the offices of Root, 
Clark, Buckner & Ballantinc turned to his ranks of lawyers and 
said, “I guess about three dozen of you had better get out to 
work on this Paramount case.” 

God knows how many lawyers are enlisted in the firm which 
has Elihu Root and Emory Buckner as members. There must be 
a sizable crowd if three dozen of them can be turned into one 
case. And they must be men of conspicuous ability, too — all of 
them — for they certainly earn the jack. 

Root, Clark, Buckner & Ballantinc have offered bills to the 
amount of $957,000 for their services in the cause. A million dol- 
lars (virtually a million dollars) is considerable money to ask 
of a corporation just emerging from the holy fire of bankruptcy 
and trying to struggle toward a newer and finer destiny. But the 
firm was very careful to show why the money was due. 

It served, in the first place, in several different capacities. It 
was attorney for the Equity Receivers, the Trustees in Bank- 
ruptcy, and the Trustees of the Debtor. It occurs to our ill-trained 
mind that there must have been some black looks from one desk 
in the office toward another desk in the office when one of the 
crusaders for the Trustees in Bankruptcy got to arguing with a 
colleague who was devoting his soul to the Trustees of the 
Debtor. Be that as it may, none of the boys was starving. 



The Ritual of Corporate Reorganization 257 

I liked the fine frankness of Mr. Grenville Clark, appearing for 
the firm in the initial hearing, when Judge Coxc said mildly that 
the claims seemed “a little steep” to him. Mr. Clark said that he 
and thirty-five associates, aided now and again by other mem- 
bers of the firm, had put in a total of 72,000 hours on the case. 
Therefore, he went on, the $957,000 total represented an average 
hourly wage of only $13.17 for each of the lawyers of his com- 
pany engaged in the litigation. 

He made that $13.17 seem a trifling amount, but our pencil 
began to scribble. Figuring an eight-hour day and a five-day 
week — fifty-two weeks in the year — it appears that Root, Clark, 
Buckner & Ballantine have in their offices at least thirty-six law- 
yers whose services are worth, each, $27,393.60 a year. 

As we suggested at the beginning, our notion was to get some 
high-class legal opinion on the way these things happen, because 
goings-on of such nature come under the head of big business, 
and a lawyer is the only man we would trust to explain anything 
about big business. We even called upon the attorney for the new 
Paramount corporation, former Judge Thomas D. Thachcr, who 
is protesting the size of the fees demanded. He appeared at the 
hearing in the Federal Court last week and argued against the 
“exaggerated notions” of the lawyers who are asking these fees. 
We presented to him a rather plaintive request that he tell us 
more about the reasons for his protest — it was, of course, none 
of our business how much he will charge the corporation for 
entering the lists in its behalf. But Judge Thacher rebuked us, 
gently, however firmly. He did not regard it as a proper thing, he 
said, to discuss a case with anybody as long as it is in an unsetded 
condition, and in the hands of a court. 

We fell back, at last, upon our lawyer friend again. He is a 
little lawyer — not one of those $27,393.6o-a-year men — and he 
probably couldn’t even get a job with Stroock & Stroock, much 
less Root, Clark, Buckner & Ballantine. He said, “Look. The 
lawyers for the new corporation put aside $2,500,000 for the 
lawyers in the bankruptcy to take a cut at, didn’t they? The 
newly organized firm earned $5,000,000 that year, didn’t it? 



258 T he Folklore of Capitalism 

Did the stockholders do anything to deserve all that money? 
They did not. When there is a sure $2,500,000 to shoot at, you 
don’t shoot short, do you?” 


Morris Markey. 

The total of these fees was drastically reduced by the 
United States District Court to about $870,000, many of the 
claims being disallowed entirely. It seems odd that reputable 
attorneys of high standing should have presented bills which 
later could be held so immoderate. Had the bills been for 
any other type of service, one would have suspected extor- 
tion. No such standards can be applied to the situation here. 
The ritual which these lawyers were conducting in this free- 
for-all combat could be subjected to no pecuniary standard 
of value. It was essentially a priestly function. The lawyers 
considered these enormous sums their just due. 

Large fees in such situations are the rule rather than the 
exception. Generally counsel fees in reorganizations consti- 
tute the largest single item for all services and usually exceed 
the compensation of the officers or groups which the attorney 
represents. The fees represent high-class boondoggling and 
bureaucratic red tape of so complicated a nature that it is al- 
most impossible to say at what point they are unjustified.^^ 
Moral judgments can scarcely be made. In addition to fees, 
key places in any reorganization offer opportunities for dis- 
tribution of valuable patronage. The stakes of participation 
in reorganization have become so high that they often arc a 
greater objective than the reorganization itself. 

The situation is very similar to the control of a municipal 
government by a political machine, with the possible cxccp- 

The remuneration of those taking part in reorganizations is analyzed 
in the Report of the Securities and Exchange Commission, Part I, “Strategy 
and Techniques of Protective and Reorganization Committees,” pp. 99-218. 



The Ritual of Corporate Reorganization 259 

tion that public opinion does not permit politicians to take 
any such percentage of the income of the municipality which 
they control. Politicians are not protected by any respectable 
symbols. Fees and patronage in industrial organization, 
however, are protected by two myths which work together as 
follows: (i) Nothing that great American businessmen do 
with their own property can be other than helpful. (2) Great 
organizations are in fact American businessmen. It is the 
combination of these two myths that creates an anarchy 
which makes ethical conduct on the part of socially minded 
businessmen almost impossible. This can be illustrated by 
concrete examples. 

In 1933 a group of New York bankers closed 280 stores of 
the McClellan chain, which were operating all over the 
United States.^ ^ The means used was shutting off their credit 
for running expenses. The reason was probably sheer fright, 
since subsequent events showed that McClellan Stores were 
solvent. The bankers’ action frightened other banks and the 
McClellan organization stopped functioning. The effect of 
this uncontrolled use of an arbitrary power was felt in far- 
distant cities. The security of employees was gone. Investors 
found that a capital levy had been made when the stock lost 
practically all its market value. Landlords found that their 
leases were without present value. The social reverberations 
can be imagined. 

The company went into bankruptcy. Competing protective 
committees were formed to get hold of die securities and thus 
control the reorganization. Persons who had inside informa- 
tion bought the stock, thus completing the capital levy on the 
former stockholders. After a prolonged battle the organiza- 
tion, with the same president, survived. The stores operated 
again. What actually happened was the transfer of securities 

Idem, Part I, “Strategy and Techniques of Protective and Reorganiza- 
tion Committees,” pp. 65-99. 



260 T he Fol kjore of Capitalism 

and thus of purchasing power from people in widely sepa- 
rated cities to people in New York, Had the Government in 
Washington made any such transfer, it would have been a 
national scandal. However, this was regarded as only a case 
of an individual who had become bankrupt. Some persons in 
New York, however, had levied a very heavy tribute on a 
large group scattered all over the country. 

An enterprising young financier named Hedden, knowing 
the condition of the company, had bought up claims of land- 
lords on leases with a probable face value of millions of dol- 
lars for §160,000 plus $67,000 for legal services. He did this 
by taking advantage of their ignorance and fright and his 
own superior opportunity to obtain information.^® “Taking 
advantage” is probably too strong an expression, because 
what he did was well within the limits set by economic ethics 
for traders. After acc|uiring these claims he sold them to the 
McClellan Stores Company at a net bonus of 35,000 shares 
(six per cent of the entire capital stock). The shares were 
then selling at $12, making a profit of $420,000. His superior 
boldness and ingenuity netted a great advantage both for 

“Mr. Hcddcn having determined exactly how necessitous each land- 
lord was, his agents traded with the advantage of knowing to what extent 
each landlord ‘had to have money.’ He testified; 

“Q. You mean there were occasional cases of hardship where a man 
needed $5,000 now rather than $40,000, ten years from now? 

“A. Not only occasional cases, but that was the real reason for every 
one of these sales. They had to have money. 1933 a low period. These 
fellows had obligations. I made it my business to try to find out what 
their obligations were, to find out how far they could afford to trade with 
me, and it was their necessity for immediate cash that forced them to make 
a deal. 

“Q. It would be their necessity for immediate cash in those cases upon 
which you would trade, by which you would get the benefit of a good bar- 
gain; is that correct? 

“A. That certainly helped me get good bargains.’* (Idem, Part I, 
“Strategy and Techniques of Protective and Reorganization Committees,’’ 
pp. 81-82.) 



The Ritual of Corporate Reorganization 261 

himself and the reorganized company, but at the cost of a 
drastic capital levy on the landlords scattered from Montana 
to Florida. However, they did not consider it a capital levy, 
but took it with the resignation with which one accepts acts 
of God. Assuming McClellan Stores was a big individual, this 
attitude was natural enough. Had it been considered as a 
governmental organization, such political profits would 
never have been permitted. 

The capital levy on the shareholders arose out of the com- 
plete anarchy of the situation. There is no reason to believe 
that had Hedden not been in the picture the wreckage would 
have been any less unless he had been a philanthropist. On 
this possibility he testified as follows: 

Q. The picture, as I get it, is something like this: when a cor- 
poration goes into bankruptcy, the property is treated, in effect, 
as lost and found property, and the landlords and the stock- 
holders and everybody arc entirely dependent upon a champion 
who happens to come along, and they are protected only insofar 
as that champion happens to be a decent fellow, that there is no 
regulation — no legal way — of judging either the ethics or the 
cupidity of those champions, and it approaches anarchy, doesn’t 
it? 

A. It approaches pretty close to it, and when you have high 
minded committees you have a workable situation. When you 
have self-seeking committees, you do not. (Idem, Part I, “Strat- 
egy and Techniques of Protective and Reorganization Commit- 
tees,” p. 87.) 

Out of such complete anarchy the laws of credit and an 
uncontrolled fiscal economy were supposed to make sense. 
Never since the decline of the Roman Church just before the 
Reformation had the dreamworld of learned men been so 
completely at variance with the world of fact. Under the 
glow of the setting sun of the fiscal world of 1932 men in- 



262 T he FolJ^lore of Capitalism 

vented new kinds of paper currency and credits by means of 
which the more skilful of them achieved great power. The 
story of the knights errant of those days is a fascinating saga. 
Unfortunately, the creed of currency is a stranger language 
than the creed of chivalry and the story is harder for most 
people to listen to. However, Insull, the Van Sweringen 
Brothers, the House of Morgan, S. W. Straus and Company, 
whose investors never lost a cent. Odium of the Atlas Cor- 
poration, Wallie Groves, and a long line of greater and lesser 
men, some good and others bad, struggled to build up power 
without being burdened by any public obligation after they 
had acquired it. Such a process, men thought, was the way 
of God and anything else led to destruction. There was only 
one threatening danger to the independence of these indus- 
trial knights errant and that was the United States Govern- 
ment. In the year 1937 the poll taken by the Institute of 
Public Opinion showed that two thirds of the people of the 
United States did not have a decent living wage to support 
their families according to what they considered the mini- 
mum standards of the time. They saw a productive plant 
which was not running to its full capacity and did not under- 
stand why more goods should not be distributed to them. 
They looked to the Government for relief. The greatest psy- 
chological factor which kept the Government in its place and 
compelled it to render unto Caesar the things that were 
Caesar’s was found in the symbols of taxation by which it 
could be proved that government activity always cost money 
whereas private activity “made money.** 



CHAPTER Xr 


The Benevolence of Taxation by Private 
Organization 

In which it is shown how taxation by industrial organizations is 
a pleasanter way of paying tribute than taxation by government. 

T he folklore of the day thus protected any expendi- 
tures, however fantastic, from investigation or criti- 
cism, provided they were made by great industrial 
organizations. Such spending was considered that of a free 
individual spending his own money. The same folklore ham- 
pered government expenditure by correlating it with the 
unpleasant symbol of the taxgatherer. The difference in atti- 
tude was caused by the emotional reaction to these under- 
lying little pictures, not by any rational process of argument. 
The actual verbal explanation of the difference was, like all 
creeds, a series of contradictions. Government spending was 
dangerous because the government would keep on spending 
“other people’s” money. Such continued spending, however, 
was supposed to be a virtue in private organization because 
it was private money. 

It was also bad for men to become dependent on govern- 
mental organization; but it was a good thing for employees 
to become completely dependent on industrial organization, 
which was supposed to foster initiative and independence 
down to the lowest worker. Everyone had a chance to be- 
come a high business official. Government employees were 
supposed to have no similar incentive because friendship and 
patronage controlled under the name “politics.” These fac- 
tors did not control in industrial organizations, except in bad 



264 T he Folklore of Capitalism 

corporations, and the thinking man refused to judge the 
good corporation by the bad. 

Another difference between government spending and 
the spending by private organizations was that when the 
government wasted, it was wasting the taxpayer’s money. 
When a railroad, or a public utility, wasted, it was wasting 
its own money — which, of course, every free individual has 
a right to do unless you are willing to change your “system 
of government” and adopt “Socialism.” Of course, the great 
industrial organizations collected the money which they 
spent from the same public from which the government col- 
lected. However, in the case of a public utility, or textile con- 
cern, or a building corporation, the collection was voluntary, 
since men could go without clothes, light, or houses. Indeed 
they should go without them, if they had no money to pay 
for them because if they didn’t they would become dependent 
on the government. When the government collected, the col- 
lection was an involuntary tax, which in the long run fell 
upon the poor, because of the great principle that it is unjust 
to tax the rich any more than you happen to be taxing them 
at the time, and that the rich will refuse to hire the poor if 
taxed unjustly. 

One method by which private organizations collected 
revenue was through offering opportunities for investment. 
Investors were supposed to be protected from losing their 
money due to the fact that there were always sound bankers 
to give them advice. If they picked an unsound banker, that 
was their fault and it was supposed to be a lesson to them, 
not a tax on their families. In such cases it was said that the 
investor had voluntarily “lost” his money. It was not con- 
sidered good form for him to complain. Thus we found great 
educational institutions whose endowments had suffered 
heavily because of their investments declining to advertise 
such “misfortunes” and spending all their time worrying 



Taxation by Private Organization 265 

about the calamities of high taxation. When the public gen- 
erally lost its money, it showed a regrettable lack of judgment 
on the part of the public. It was not considered as taxation 
by private organizations. 

It was, of course, possible for an investor to lose his money 
without its being his own fault. For example, government 
interference in business was thought to be capable of achiev- 
ing just that result. It made businessmen timid and ineffec- 
tive and destroyed business confidence, so that even good in- 
vestments became bad. The depression obviously was not 
caused by government interference in business. It was one of 
the results of the War, which had made businessmen over- 
confident and greedy. However, most sound businessmen 
were not the kind of men who would get overconfident and 
greedy, and if they did, the government could put brakes on 
by delicately manipulating the re-discount rate. This hadn’t 
done any particular good prior to the last depression, but no 
one exactly understood the causes of the last depression, ex- 
cept the most learned economists, and they could not explain 
it to anyone because it was so complicated. However, that 
very complication proved that nothing should be controlled 
by the government because no one could be trusted with that 
much power, since power always led to tyranny. It was 
thought that there were men who could run the government 
scientifically. Such men, however, would never be selected 
because of politics, which selected automatically only people 
who appealed to popular emotion. Therefore, it was danger- 
ous for government to interfere in the taking of money from 
investors by private organizations, even in cases where it was 
not the investors’ own “fault.” Government control was sup- 
posed to be limited to setting moral standards for good cor- 
porations, so that the investor would have a free choice be- 
tween good and bad investments. 

A realization that a certain amount of claims against great 



266 T he FolJ^ore of Capitalism 

organizations were bound to be bad gave rise to the theories 
of ‘liquidity” and “diversification” of investments. This was 
the reconciliation of the conflict between the notion that a 
wise man could select “sound” investments and the fact that 
every wise man was bound to select a number of bad cor- 
porations. In a society where the chief source of security is 
productive land, no farmer considers it a good thing to own 
little pieces of a hundred farms in order to get diversification 
of his investments, nor does he think that these little portions 
of farms should be “liquid” so that he can unload them at any 
time on someone else in order to preserve that diversification 
of investment. Instead he thinks of his farm as a productive 
plant which he can operate himself to make a living. As so- 
ciety is at present organized, however, wealth and property 
do not consist of things which individuals can use produc- 
tively, but in claims on organizations. The wealth of these 
organizations in turn consists in part in claims on other or- 
ganizations, which in turn have claims on still other organi- 
zations. Those seeking position, control, or security in that 
situation must be able to jump around rapidly as conditions 
change. Shifting allegiances become imperative because stick- 
ing to one organization is accompanied by unforeseeable 
hazards. 

To describe this scene in terms of private property required 
a new term, which was supplied by the word “liquidity.” The 
term filled the emotional need for pretending that place and 
privilege with organizations were like the old tangible prop- 
erty of our traditions. At the same time, by using the analogy 
of running water, it conveyed the notion that this kind of 
“property” could flow away very easily. The connotations 
which surrounded the word “property” prevented control by 
government. The connotations of the word liquid justified 
the operations of the stock exchange and the various types of 



Taxation by Vrivate Organization 267 

manipulation by which men obtained control of vast indus- 
trial empires. This justification was naturally expressed in a 
phrase which pointed out its advantage to the investor rather 
than to the manipulator. “Liquidity of property” was the 
means by which “diversification of investment” was the 
means by which a wise man could achieve security in his old 
age. 

Everyone was supposed to understand the advantages of 
this diversification. Those who didn’t understand it and put 
all their eggs in one basket deserved the consequences. A 
proper economic system was one which encouraged wise in- 
vestments and discouraged foolish ones. Anything else was 
paternalism and destroyed character. If a man who had a 
thousand dollars to invest lost it foolishly, this worked out 
for the best because it tended to eliminate the unwise. People 
were supposed to learn from experience. Of course, they 
never did, but this was on account of human nature, which 
never changed. 

So much for corporate tax levies under the term “invest- 
ments.” The other method of tax collection was called “pur- 
chasing.” Rents, light, heat, transportation to and from work, 
were regarded as services purchased voluntarily. Police pro- 
tection, libraries, parks, were paid for involuntarily by taxes. 
Therefore, the real danger to the income of the small man 
was supposed to be taxes and not prices, because he had a 
choice in the matter of purchases. Therefore it was public 
waste of funds that had to be watched. Private waste of funds 
would take care of itself, since the profit motive prevented 
businessmen from wasting. Government had no profit mo- 
tive and therefore was bound to waste more because of the 
extravagant theories habitually entertained by those who do 
not work for profit. And then, anyway, private funds, when 
wasted, only aUect the individual who wastes them (and 



268 T he Volhjore of Capitalism 

corporations were individuals), whereas the waste o£ public 
funds affects posterity, since they will have to be repaid by 
the taxpayers of the future. 

Therefore, the money taken from the public by advertising 
and high-pressure salesmanship for useless and even harmful 
articles was not to be compared with the money which the 
government would waste trying to regulate it, since funds 
taken from the public by a selling campaign which mis- 
represents the article are not public funds, and funds taken 
from the public by taxes are. The public had the free will to 
resist selling campaigns, but they were forced to pay their 
taxes.^ If they didn’t resist selling campaigns, then it was 
their own fault, and character deteriorates Lf people arc not 
punished for their own fault. Even the fraudulent selling of 
food and drugs could not be effectively controlled, so deep- 
seated were the little underlying pictures which we are de- 
scribing. 

By means of this folklore a curious set of mental habits 
grew up. People grew to distrust service rendered them by 
that type of organization called the State, because they felt 
they would be “taxed” to pay for it. They preferred the serv- 
ices of great industrial organizations because they did not 
consider their contributions to such corporations as taxation. 
Men in America were so conditioned that they felt differently 
about taxes and about prices. The former was an involuntary 
taking; the latter a voluntary giving. Prices were something 
a person could pay or not pay as he chose. 

Thus all government activity became associated with a very 
unpleasant symbol, that of forced contributions. Business 
activity was correlated with the pleasant symbols of a free 
man going into the market place and buying what he chose. 

tin a book which i* both accurate and Interesting (The Popular Pr^- 
flee of Frauds New York, Longmans, Green & Co.), T. Swann Harding 
analyzes our national sales methods. The notion that selling is a free-will 
affair based on judgment U very effectively destroyed. 



Taxation by Private Organization 269 

So it was that men opposed government eflforts to furnish 
them with light, power, housing, credit, and looked with 
suspicion at government efforts to solve national problems. 
Everything that the government did meant higher taxes, in- 
voluntarily paid. 

No one observed the obvious fact that in terms of total in- 
come of an individual it made no difference whether his 
money went for prices or taxes. Men believed there was a 
difference because prices were automatically regulated by the 
laws of supply and demand. If any great corporate organiza- 
tion charged too much, in the long run it would be forced 
out of business by other corporations which did not charge 
so much. This might not be quite so true if the corporation 
had a monopoly, but our antitrust laws protected us from any 
situation like that (or if they didn’t, it was the fault of the 
politicians who could always be removed from office by right- 
thinking individuals). So men convinced themselves of auto- 
matic protection with respect to prices by showing that where 
such protection did not exist it was due to following some 
unsound principle which could be corrected by “thinking 
men.” 

The exact contrary was true with respect to taxes. Here 
men were at the mercy of politicians and no sound principle 
operated in this field. Laws of supply and demand were con- 
stantly being set aside by politicians. They were interested 
only in their own personal profit. If it were observed at this 
point that the selfishness of businessmen interested in their 
own personal profit might have the same effect, the answer 
was that the selfishness of businessmen was a different kind 
of selfishness, because we operated under a profit economy 
in which business profit always worked to a good end and 
political profits always worked to a bad one. This was 
all explained in the books on economics and it was guaran- 
teed by the Constitution of the United States. Thus loyalty to 



270 The Folklore of Capitalism 

business leaders and distrust of political leaders was funda- 
mental to the religion of all right-thinking men, who trusted 
prices and feared taxes. 

Economic learning was based on the theory that this folk- 
lore was the only folklore which a reasonable man could 
hold. It was of two kinds, practical and philosophical. Philo- 
sophical economics was a ceremonial literature which recon- 
ciled the conflicts. Practical economics often was a set of 
formulas which worked out pretty well in narrow fields, in 
which people reacted to their folklore in the customary way. 
Thus it was useful in explaining events in a time when com- 
petition between actual individuals actually existed. It was 
of course unsuccessful in predicting the character and the 
extent of the depression, because that event occurred in a 
world of specialized organization where men were losing 
faith in their folklore. Hence predictions made on the as- 
sumption that the reaction to symbols in that new world 
would be the same as it had been ten years ago were all 
wrong. In such times economic learning leads us astray. 

Returning to our main tlieme, the symbols of taxation, it 
is apparent that the result of this intellectual atmosphere was 
to endow corporate enterprise with all the pleasant methods 
of collecting public funds. Its ways of collecting tribute were 
the ways about which no right-thinking individual was sup- 
posed to complain. Consequently it was inevitable that so- 
called ‘'private'’ government should become a greater factor 
in the distribution of goods than public government. 

Efficiency has nothing to do with this. No one can say 
what the term means. People who are able to produce co- 
herent organizations develop superstitions which aid those 
organizations to function. Americans could have organized 
just as “efficiently” had the folklore developed differently, 
under the term “public” government. Of course, there would 



Taxation by Private Organization 271 

have existed conflicts and some ceremonial body would have 
arisen to reconcile those conflicts. The conflicts might have 
been less violent; but that is sheer speculation. England ap- 
pears to have met internal problems with less degree of tur- 
moil and conflict by giving ‘‘public’’ government more re- 
sponsibility. But England went through a similar ideological 
struggle. It is easy to recall almost the same conflict and dis- 
couragement when England first went on the dole (that is, 
when governmental distribution of goods was fiirst strug- 
gling for recognition). It is not the concern of this book to 
speculate what might have happened in a different climate 
of opinion. 


Methods of Private Taxation 

There are many methods of levying industrial tribute, just 
as there are all sorts of governmental tax schemes. It is im- 
possible to formulate a rounded philosophy for either set of 
methods, because both represent the results of practical men 
engaged in perfecting organization and at the same time 
seeking to conform to a philosophy by emphasizing now one 
of its contradictory ideals and now another. Therefore we 
will have to describe their methods, not by generalizations, 
but by illustration. 

We have already noted that one of the principal methods 
by which industrial organizations levied tribute is known as 
“investment.” The operation of that method may be illus- 
trated by the sale of foreign bonds in this country since the 
War. The method is interesting because this particular levy 
was made almost exclusively for the benefit of foreigners. It 
reached its apex in 1927 and 1928. A list of the amounts levied 
in this country for the improvement of other countries from 
the beginning of the War is given in the following table, re- 
printed from American Underwriting of Foreign Securities 



272 T he Folklore of Capitalism 

in /pj/. Trade Information Bulletin No. 802, published by 
the United States Department of Commerce. It lists the for. 
eign capital issues, both governmental and corporate, pub. 
licly offered in the United States from 1914 through 1931. 



Number 

Total 


of 

Nominal 

Period 

Issues 

Capital 

1914 

26 

$ 44,670,288 

1915 

80 

817,529,272 

1916 

102 

1,159,601,264 

1917 

65 

720,297,150 

1918 

28 

23,465,000 

1919 

65 

771,044,700 

1920 

104 

602,937,986 

1921 

116 

692,412,963 

1922 

152 

863,048,284 

1923 

76 

497.597.350 

1924 

X20 

1,217,217,937 

1925 

164 

1,316,166,150 

1926 

230 

1,288,459,182 

1927 

265 

1,577,414,260 

1928 

221 

1,489,361,680 

1929 

148 

705,767,681 

1930 

• 

I 2 I 

• • 

1,087,560,214 

• • • 

1931 

41 

285,199,500 


'Estimated 

Estimated 

Refunding to 

New Nominal 

Americans 

Capital 

$ 655,000 

% 44,015,288 

13,675,000 

803,854,272 

5,700,000 

1,155,901,264 

37,650,000 

682,647,150 

2,600,000 

20,865,000 

379.257,300 

391,787,400 

105,500,000 

497,437,986 

69,105,083 

623,307,880 

99,421,300 

763,626,984 

77,000,000 

420,597,350 

247.993,500 

969,224,437 

239,700,000 

1,076,466,150 

162,978,000 

1,125,481,182 

240,654,000 

1,336,760,260 

238,410,413 

1,250,951,267 

34.536,875 

671,230,806 

182,227,000 

905,333,214 

• • • 

56,365,000 

228,834,500 


The year 1931 marked the end of this era of foreign long- 
term lending (Madden, Nadler, and Sauvain, America’s 
Experience as a Creditor 'Nation [1937], p- 68). 

This table of foreign capital issues from 1914 to 1931 shows 
a steady yearly increase in the amount of the issues after 1920 
with the exception of the years 1923 and 1926, until the peak 
year of 1927 was reached. The two succeeding years show 
reductions. There was a spurt in 1930, followed by a precipi- 
tous decline in 1931. 

Foreign Bondholders Protective Council, Inc., Annual Re- 
port, 7934, p. 9, states: “It has been estimated that during the 



Taxation by Private Organization 273 

years 1920 to 1931, inclusive, there were floated in the United 
States approximately $10,500,000,000 of foreign dollar bonds.” 
Statistics for this period compiled by the United States De- 
partment of Commerce show the aggregate amount of all 
foreign capital issues including refunding issues, the stock 
of foreign corporations, and certain other issues not strictly 
foreign bond investments, as $11,623,143,187.^ 

Several interesting things are disclosed by this table. It ap- 
pears that ten years after the War private taxation to send 
goods abroad exceeded in amount even the levies during 
the War. 

Let us examine the mental pictures under which these 
levies were made. Of course, they had no “security” behind 
them. There was no international court which could fore- 
close. Nevertheless, people believed that there was some sort 
of economic law which made it impossible for foreign gov- 
ernments to repudiate their bonds because this would dam- 
age their credit. Their own self-interest created a compulsion 
on them to pay to maintain that credit. This was in accord 
with the general economic idea that in the long run men 
work for their self-interest. 

The particular countries on which this self-interest would 
have the greatest effect were selected by bankers. Only radi- 
cals suspected that the judgment of great bankers was not 
wise. There was supposed to be a direct connection between 
the soundness of government and its ability to float loans, 
which the bankers knew all about because they had studied 
the matter so thoroughly. 

The relation of this theory to fact is shown by tabulating 

2 The above paragraphs are a paraphrase of footnotes 6, 7, and 8, p. 4. 
of the Report on the Study and Investigation of the \Vorf{, Activities, Per^ 
v)nnel and functions of Protective and Reorganization Committees, Part V, 
“Protective Committees and Agencies for Holders of Defaulted Foreign 
^/overnmental Bonds." 



274 


The Folf(lore of Capitalism 


the amounts loaned to various countries and comparing 
them with the size of the defaults. Such a comparison illus- 
trates how little the past credit record of foreign countries 
has to do with their ability to obtain loans from conservative 
bankers. The record of South American countries has been 
consistently bad. Yet you will note that more debts were 
outstanding in 1935 from South America than from Europe, 
whose credit record at the time the loans were made was in- 
finitely better. A litde higher interest rate did the trick. Inci- 
dentally, Germany had no difficulty in obtaining goods and 
services from the American public by this method of taxa- 
tion just before her complete and utter financial collapse. 
During the same years, sound municipalities in this country 
were told that if they did not balance their budgets, they 
would never be able to obtain credit from private bankers 
(who were then thought to be the only source of credit per- 
mitted by a sound system of government). On December 31, 
1935, the amounts of foreign bonds outstanding and the de- 
faults were as follows:’ 

In Default as 

Outstanding to Interest 


Latin America 
Europe 
Far East 

North America (Canada) 


$1,538,431,980 

1,489,553,200 

531,573,200 

1,785,891,210 


$1,175,383,400 

567,614,600 

5,500,000 

400,000 


55.345.449.59'. $1,748,898,000 


The levy represented by these defaulted bonds was widely 
distributed. It was estimated to include between six and 
seven hundred thousand “investors.” They were the people 
of thrift, who had consulted sound bankers, as is evidenced 
by the fact that the norm of the amount invested was esti- 
mated to be $3,000. These taxpayers included every kind of 


® Idem, Part V, “Protective Committees and Agencies for Holders of De- 
faulted Foreign Governmental Bonds,** p. 6. 



Taxation by Private Organization 275 

individual or society which customarily has any funds. We 
quote from the Annual Report of Foreign Bondholders Pro- 
tective Council, Inc., for 1935,^ with reference to a single de- 
faulting country, the Republic of Chile: 

The Committee of Bondholders for the Republic of Chile Bonds 
has included in the registrations with that Committee individual 
bondholders, banks, trust funds, schools, colleges, universities, 
theological seminaries, churches, church societies, libraries, hos- 
pitals, memorial homes, foundations, orphanages, Y.M.C.A.’s, 
and cemetery associations. Every State in the United States, one 
territory of the United States, the District of Columbia, and 
thirty foreign countries are represented in the registrations so far 
received. While a number of the registrants hold substantial 
amounts of bonds, the average holding is very small, showing an 
extremely wide distribution of these bonds. 96% of the bond- 
holders who have registered represent holdings of less than 
$20,000 worth of bonds per person, and the average holding of 
this 96% of registrants is $800 wordi of bonds per person. The 
4% of the bondholders who have registered holdings over 
$20,000 represent an average holding of $142,000 worth of bonds 
per registrant. The average holding of all categories is $5,830 
worth of bonds per person. 

You will note that the “tax base’* of this corporate system of 
taxation was much broader than any which the government 
would be permitted by the folklore we have been describing. 
Imagine the government collecting large sums of money 
from hospitals, educational institutions, or orphanages to 
build public works in backward mining areas. Government 
is supposed to leave thrift alone, so that these funds may be 
collected by private enterprise for its own expenditures. Pri- 
vate organization is supposed to take all the money saved by 
the thrifty and in return promise them security for their old 

^ Idem, Part V, "Protective Committees and Agencies for Holders of De- 
faulted Foreign Governmental Bonds/* pp. 6-7. 



276 T he VolXlore of Capitalism 

age. These promises are kept better by some types of organi- 
zation than others, notably life insurance companies. How- 
ever, the respectability of the private organization represents 
only a current guess, which is bound to be wrong a certain 
percentage of the time. The reason for this is that once an 
organization has become so respectable that it is a proper 
one for widows and orphans to trust, great pressures exist to 
use that respectability to get all the funds possible. Then, at 
the height of its power, when it is most respected, it becomes 
the worst organization for widows and orphans to trust. This 
is a common development among respectable institutions. It 
happened just before the depression in the case of banking 
and investment houses. There was no limit to the money 
which they could collect because of the faith people had in 
the names of the great financial institutions which distrib- 
uted to the public such investments as these defaulting for- 
eign bonds. It is always the most respectable organizations 
which levy the heaviest tribute. Frankly speculative organi- 
zations collect money from a different source and cause much 
less suffering. It was Insull, not Capone, who wrecked the 
financial structure of Chicago. 

In any event, the myth that the great corporation is “wise” 
in its expenditures, and therefore safe to trust with funds, is 
what has given the corporation its power to make these pub- 
lic levies. It has built slums and skyscrapers and created the 
civilization that we see before us. The writer has no com- 
plaint about that civilization. He realizes that reverence on 
the part of its members is what gives it its strength and when 
that reverence falters, the institution falters. It is essential to 
the success of any social organization, or creed, that it must 
represent the true and the only proper way of society. For 
the purpose of diagnosis, however, we are here temporarily 
abandoning our habitual attitude of respect for all respect- 
able things, in order to see better how the wheels go round 



Taxation by Private Organization 277 

and how it happens that the levy of tribute by private or- 
ganization has become so firmly accepted as “right” and 
“natural.” 


Where Did the Money Go? 

Such were the little pictures behind these private levies. The 
next question is: Where did the “money” go? Were the ex- 
penditures “wasteful” or “wise”? The last question is hard 
to answer. There are no standards of waste or wisdom of 
expenditure from the point of view of society as a whole, 
except the preferences of the individual as to what activities 
he desires to encourage. Is a painting more wasteful than a 
football game, or is either wasteful? Are the movies a 
“waste”? Such questions will not be debated here. Men re- 
quire something other than food and drink and they will 
gladly starve themselves for such wasteful things as love, 
war, or churches. The concept of “wasteful” expenditure 
has little relevance in the broader field, except as a method 
of keeping the government from entering the field of pro- 
duction of goods. Here it fits in with the mythology of the 
times and can be used with telling effect. 

The question of where the particular “money” went which 
was raised by the foreign-bond method of levy is less abstract. 
Actually, it represented goods for the most part sent to the 
foreign governments for use in building up their own coun- 
tries. The sale of foreign bonds in this country for the benefit 
of South American republics may be likened to a great pub- 
lic-works campaign. It built schools, and parks, and roads, 
and armies in South American countries. Of course, not all 
of it went to public works. Some of it was used for bribes 
and all sorts of sub rosa activities which are an inevitable 
part of public activities. But in its larger aspects it meant that 
the United States had worked and schemed to improve South 
American republics, collecting for that purpose taxes on 



278 T he Folklore of Capitalism 

institutions in this country, including orphanages and 

hospitals. 

This public-works program had none of the psychological 
hazards attending public-works projects promoted by the 
Government. For example, nobody worried about the char- 
acter of South Americans. Their characters were not highly 
regarded, and we felt no responsibility for them as we did 
for our own people. Therefore, if Chileans leaned on their 
shovels or sat in the shade while building roads in Chile or 
El Salvador, no outraged newspaper editors filled their col- 
umns with protest at the wastage of American money. No 
one worried about where the money to pay for these improve- 
ments was coming from, because the taxes to pay interest on 
the bonds had to be met by foreigners and hence were not a 
burden on our own posterity. Indeed, all the symbolic handi- 
caps which prevented our spending money to improve the 
West Side of Chicago were absent when we improved Chile, 
or Peru, or Germany. Therefore, it was possible in those curi- 
ous days to do things for others which we could not do for 
ourselves, to collect a billion dollars a year as a great bonus 
for foreign countries because we regarded them as individ- 
uals who would pay us back and at the same time to neglect 
soil erosion and flood control in this country because they 
would be a burden on the taxpayers of the future. 

Government Waste Compared to Private Thrift 

As typical of this kind of thinking we quote from a column 
by Dorothy Thompson, selecting her because she followed 
so closely the opinions of conservative, respectable people 
who liked to think of themselves as a bit on the liberal side. 
This particular column deals with tax evasion and spending. 
After expressing grave doubt as to whether we arc getting 
our money’s worth for the money which the Government 



Taxation by Private Organization 279 

spends in this country, Dorothy Thompson continues on a 
note of rising indignation : 

We have had increasingly little to say about it, even through our 
elected representatives. 

Great gobs of it are just handed over to the administration to 
spend as they see fit, and if they want to buy piccolos to im- 
prove the musical sense of mountaineers or settle families in a 
deserted village, attended by nurses in the form of social workers, 
to take their economic temperatures three times a week and re- 
cord in interminable card catalogues their ways of feeding the 
baby and dressing him they can t expect enthusiasm from the 
contributors. 

People with country estates have paid their income taxes and 
dismissed their servants in order that the servants might go on 
the relief rolls and be worse paid for doing worse work. It s 
patently against the spirit of the law to incorporate a pleasure 
estate and write off its luxuries as losses; on the other hand, it 
was suggested to me some months ago by a New Deal ofBcial that 
I might buy myself a few thousand acres of eroded land for a 
song and have it reforested by the C.C.C. boys at Government ex- 
pense, and that seemed to me a rather more immoral procedure. 

It would never have occurred to Dorothy Thompson to 
complain because our representatives had increasingly little 
to say about the expenditure of the billion dollars invested 
in foreign bonds. And if it had occurred to her, no one would 
have paid any attention in 1927, when the bonds were being 
sold, or very much attention in 1937, after the crash had oc- 
curred. There is something immoral to Dorothy Thompson 
in using government money to aid landowners in planting 
trees on eroded land, in spite of the fact that it results in a 
permanent source of future wealth and taxes. Cultural ad- 
vantages given to mountaineers at government expense also 
fill her with a fine satirical scorn, because they come from 
“taxes.’’ We infer that she has no objection to Mr. Rocke- 



iSo T he Fol\lore of Capitalism 

feller’s benefactions, because they come from people who pay 
prices and from investors, rather than taxpayers. 

She ends, as every columnist with a moral purpose should 
end, on a note of warning: 

This column hopes that all tax evaders are caught and forced to 
cough up. But it also hopes that the Government will encourage 
more honesty and willingness on the part of the taxpayer to meet 
his obligations by spending the money in a more careful fashion. 
Otherwise the task of the Treasury Department will become 
comparable to the task of enforcing prohibition. {New YorJ^ 
Herald Tribune, June 4, 1937.) 

She would have hesitated a long time before spreading the 
notion that if a public utility did not watch its step people 
might stop paying their bills. Such an action would have 
been like the sit-down strike, illegal, leading to anarchy, and 
not to be “condoned.” 

We do not wish to criticize Dorothy Thompson, who is 
the favorite columnist of most of our friends. We use this 
excerpt only because it was typical of the instinctive reaction 
of everyone writing and thinking on the subject of govern- 
ment expenditures, as opposed to private expenditures. A 
columnist who was not caught in current folklore as Doro- 
thy Thompson was would not have achieved her popularity. 
Thus the implicit belief that nothing but efficiency could re- 
sult from uncontrolled private organization, and nothing but 
inefficiency could result from government organization en- 
abled us to spend vast sums as bonuses to improve every 
other country but our own. 

Foreign Bond Issues as a Method of Taxation in Order 
To Dump Surplus Goods Abroad 

What were the forces which led these respectable bankers to 
distribute these bonds and thereby effectuate this levy on our 



Taxation by Private Organization 281 

own citizens? Were they corrupt or just misled? Why was it 
that they failed to see the inherent weakness of this type of 
investment which was sold not because of any intimate 
knowledge of foreign countries on the part of the investors, 
but because of faith in the expertness of the great houses that 
underwrote the bonds? May we not in the future expect that 
this type of banker will be eliminated and this kind of capital 
levy will cease? 

If these questions are answered in terms of the prevailing 
folklore, the average man will answer that they were bad 
bankers but that bankers have “learned their lesson” and are 
different today. True the Government is playing a very large 
part in the distribution of goods, but this is an abnormal sit- 
uation. It will have to stop because of governmental waste 
and extravagance, and then a purified private business will 
collect money from the public and give it real security and 
not act as it did in the past. All bankers need today is more 
confidence. They will get that confidence when the Gov- 
ernment stops interfering with their business. Bankers will 
not abuse that confidence any more. 

If the same questions are asked from the point of view of 
one thinking about the habits and political pressures on or- 
ganizations, the answers will be entirely different. It will be 
seen immediately that it is not a question of praise or blame 
of bankers but a response to pressures, which if they were 
exerted again would produce the same results. 

For example, there were plenty of bankers who realized 
the insecurity of foreign issues. The reports on the advisa- 
bility of any particular South American loan always reveal 
a number of adverse opinions. However, the adverse opin- 
ions did not prevail. Why? Was it stupidity or something 
else? Let us look back at the situation at the time these bonds 
were issued. Under pressure from great private organiza- 
tions we had adopted a tariff policy which was opposed to 



282 T he Volhjore of Capitalism 

most of our accepted economic principles (though of coursQ 
it developed its own economic principles in defense). This 
tariff policy compelled us to sell goods abroad without buy- 
ing goods in exchange. It had become impossible to distribute 
our goods at home, not because we did not need them but 
because our own population could not “buy” them. The 
mythology of the day furnished no symbol by which money 
could be loaned to farmers as it was loaned to foreign gov- 
ernments. There was no personification of farmers as a group 
and money could be loaned only to persons. 

According to the folklore of the time, loans to governments 
were supposed to be like loans to big, strong individuals. We 
had a number of “governments,” state and municipal, in this 
country, but with few exceptions (like Coral Gables) they 
refused to borrow money in a big way. Public works never 
escaped the atmosphere of extravagance and waste. There- 
fore, when wasting goods was required, we turned naturally 
enough to foreign governments. We had surplus goods. We 
wanted to get rid of them. The best way was to send them 
abroad. This cost money. The best way of raising this money 
was from the public, by selling them these foreign bonds. If 
we had not sold these bonds, the factory wheels used in turn- 
ing out these goods might have been idle. Banks are supposed 
to “finance” industry and to keep these factory wheels 
turning. 

Under these pressures all sorts of social institutions co- 
operated. The State Department was interested in develop- 
ing “trade” with South America, in spite of our tariff 
policy. The only way that could be done so long as actual 
exchange of goods was prohibited was by loaning the money 
to South America. Therefore, the State Department did what 
it could to give the illusion of security and in a few instances 
the United States Government lent its support to the bond- 



Taxation by Private Organization 283 

holders to establish an agency to collect the revenues of for- 
eign countries. 

In addition to this, comfort was obtained by creating a sym- 
bol of a “secured loan” by the pledge of specified foreign reve- 
nues. That this was pure ritual in response to a demand for 
a symbol is indicated by Professor Borchard’s testimony be- 
fore the Securities and Exchange Commission: 

Q. That is, it is only in the rare case that creditors have the 
ability or the opportunity to reduce the security to possession? 

A. That is true. Where they speak of a pledge, it is not really 
a pledge, because the creditor, as a rule, gets nothing. It is a 
misnomer, therefore, to use the legal term “pledge.” 

Q. That term, however, was used in foreign bond pro- 
spectuses? 

A. Yes; by courtesy. 

Q. You think that the use of the word may have tended to 
mislead the public? 

A. I really could not say on that. People who know some- 
thing about it are not misled, but perhaps the uninformed 
might be. 

Q. Do you not think these foreign bonds were, to a very large 
extent, purchased by the uninformed? 

A. I fear so.® 

Thus this symbolic pledge created the necessary illusion 
of a debt secured by mortgage. In this situation those who 
were skeptical about the loan always lost and the bonds were 
issued. If one investment house turned them down, there 
was always another to take them up. There was a need to 
turn the wheels of industry by dumping goods abroad. There 
was a handy ceremony by which that need could be filled. 
Therefore, the goods were dumped. A social demand, plus 

® Idem, Part V, “Protective Committees and Agencies for Holders of De- 
faulted Foreign Governmental Bonds,” p. 20. 



284 T he Folklore of Capitalism 

a respectable symbol, creates a situation in which respectable 
men can rise to power by filling that demand. It creates the 
necessary institutions in cases where old organizations re- 
fused to participate in meeting that demand. 

In contrast let us examine another situation in which an 
even greater need to dump surplus goods existed during the 
same period in which these bonds were being issued, but 
which failed because of the lack of respectable symbols. 
There was a great surplus of agricultural products in terms 
of purchasing power. Farmers demanded that a levy be 
made on the public to dump these goods abroad. They were 
discriminated against by the tariff. Their only answer was a 
subsidy which would enable them to give these goods away. 
The subsidy, however, had to come from the Government. 
Farmers had no great organizations with the techniques of 
levying tribute. 

Therefore, in spite of a powerful political demand from the 
farm states, the McNary-Haugen bill never became a law.® 
The thing that stopped it was the fact that government was 
supposed to be able to collect money only by taxation. The 
Government was not permitted to sell bonds to the public 
for investment in order to obtain money to ship agricultural 
products abroad. This was a function which could only be 
performed by private industry, because the losses of the seven 

® The plan of the McNary-Haugen legislation was to provide by taxa- 
tion for a stabilization fund which would make up to the farmers the dif- 
ference between domestic and foreign prices when they sold their products 
abroad. The idea was that farmers should produce to the limit. What the 
purchasing power of this country could absorb at prices protected by a 
tariff would be sold here. The balance would be sold abroad for what it 
would bring and the farmers compensated for the difference. The fight 
over this general idea was at white heat during the agricultural depression 
in 1924-25, and support for the plan has continued to the present day. 
Nevertheless agricultural relief has never taken that form. 

For an excellent history of agricultural relief, sec Black, Agricultural Re* 
form in the United States (New York, McGraw-Hill Book Co., 19^9)- 



Taxation by Private Organization 285 

hundred thousand investors in foreign bonds were not con- 
sidered as taxes. 

The Protective Coloration of Taxes Privately Levied 

The final step in the foreign-bond picture is the method by 
which the investors were finally convinced that their money 
had not been taken from them by an involuntary levy, but 
that they had “lost” it. This process was carried on by pri- 
vate organizations which had an interest in making profits 
out of it. A governmental organization having public respon- 
sibility would not have served the purpose. It would have 
taken a different attitude toward the transaction from the 
beginning, and thus would have been a disturbing element 
in the whole machinery of bond selling. It would have had 
a tendency to expose the realities behind the ceremony. Since 
one of the purposes served by the final liquidation was to 
justify the whole process from the beginning and prove that 
it was only a minor unfortunate incident in the operation of 
financially sound institutions which in the long run gave 
good advice to investors, the best organizations to justify 
that belief in times of disaster were these organizations them- 
selves. Therefore, naturally enough, they struggled to keep 
their control over the machinery of liquidating investments. 
They did so because, had they lost control over that machin- 
ery, the realities of the situation would inevitably have been 
exposed. This was not the result of planning, but rather of 
instinctive protective impulses. 

The public justification for giving the control of the liqui- 
dation of bonds to the same financial group which had is- 
sued and distributed them followed the mythology of the 
times. Government organizations did not operate on the 
profit motive and therefore private initiative was more ef- 
ficient. Government organizations could only be operated at 



286 T he VolXlore of Capitalism 

great cost to the taxpayers, whereas private organizations 
made profits and hence “cost” no one anything. The process 
was practically the same in all corporate reorganizations. We 
will analyze it with respect to the foreign-bond situation be- 
cause most of the machinery will be found duplicated wher- 
ever any securities issue is liquidated. 

The first step was for the houses which issued the bonds 
(or for a group with similar attitudes which wanted to oust 
them from control) to form a protective committee to repre- 
sent as many of the vast number of scattered bondholders as 
they could induce to deposit with them. There were no rules 
about this sort of tiling. Anyone who could get hold of a 
number of bonds could act as a protective committee. The 
field was open to all. The house issuing the bonds usually 
felt that the formation of the committee was its special 
prerogative. Therefore, in the competition between the dif- 
ferent committees to obtain bonds, the issuing houses had a 
great advantage because they had the lists of former pur- 
chasers to whom they could send circulars. The advantage 
did not prevent the formation of other committees because 
there was always a chance for energetic men to collect bonds. 
Important names were a drawing card. 

A typical way in which the committees were organized is 
illustrated by the following excerpt from testimony taken by 
the Securities and Exchange Commission: 

A. ... I can tell you very quickly how we got organized; at 
this luncheon — 

Q. . . . We are back at the India House 

A. While we were discussing this, Colonel Hayes says “Here 
are two friends of mine coming over for lunch. One is Mr. Bed- 
ford, of the Standard Oil of New Jersey, and the other Harry 
McCann, President of McCann-Erickson. 

Q. What is that.? 



Taxation by Private Organization 287 

A. An advertising house — “They are good friends of mine, 
what do you say I ask them” — 

Q. You ask them? 

A. Colonel Hayes asked me, “There are two friends of mine,” 
he said. “Maybe they will go on. Shall I ask them?” I said, “Cer- 
tainly.” It sounded like they would be well qualified to go on 
there. 

Q. Why do you think they would be well qualified? 

A. I think a Director of Standard Oil would speak for itself. 
I had never met him before. I thought if we were forming a 
bondholders committee and could get a Director of Standard Oil 
of New Jersey on there, it would be a credit to the committee. 

Q. A credit to the committee? 

A. Yes. 

Q. Were you thinking of the publicity value of that? 

A. No; that didn’t occur to me at the time. 

Q. Were you thinking of Mr. Bedford as a man specializing 
in the foreign field? 

A. No. 

Q. How would it be of value, if not publicity? 

A. I have been in a great many businesses in America, and 
I have understood and known in any kind of business, if you get 
a Director of the Standard Oil of New Jersey to associate himself 
with you, you were very fortunate.'^ 

Such committees were called the self-appointed type and 
were not highly regarded. However, since all committees 
were voluntary organizations, it was difficult to determine 
the difference between the appointed and the self-appointed, 
as is evident from the following testimony of Dr. Max Wink- 
ler, a distinguished expert on foreign bonds. 

“I see no advantage at all to the holders of these bonds to deposit 
with protective committees, most of whom seem to be of the 
self-appointed and self-anointed type.” 

^ Idem, Part V, “Protective Committees and Agencies for Holders of De- 
faulted Foreign Governmental Bonds,” pp. 10 1-102. 



288 T he Folklore of Capitalism 

Concerning this statement, Dr. Winkler testified: 

Q. ... Is that an expression of your personal point of view? 

A. Yes. 

Q, That is, you arc opposed to protective committees of the 
self-appointed and self-anointed type? 

A. Yes, sir. 

Dr. Winkler proceeded to expound his definition of a “self- 
appointed’* committee. 

A. I would designate a self-appointed and a self-anointed com- 
mittee as one which is composed of men who are not suflSciendy 
familiar with the . . . cases of foreign bonds in general, and that 
particular bond issue especially, which they arc organized to 
protect. 

Q. That is, it is not a question of who appoints the members; 
it is a question of whether they are qualified or not? 

A. That would be my definition of the self-appointed. 

Q. That is not a definition, is it? 

A. That is my definition.® 

Out of ten committees listed in the report by the Securi- 
ties and Exchange Commission, only three included mem- 
bers who were bondholders or representatives of bond- 
holders. 

What were the motives which induced men to serve on 
these protective committees? Houses of issue insisted that 
they owed a moral responsibility to their customers. Others 
may have been induced to serve by the promise of the pub- 
licity. One organization, the Foreign Bondholders Protec- 
tive Council, was influenced by motives of public service. 
However, the prevailing motive was the very high remunera- 
tion. Some of the committees looked like syndicates of joint 
adventurers organized to realize as large a profit as possible. 
John Henry Hayes, a member of and counsel to a committee, 
disclosed his conception in the following language: 

® Idem, Part V, ‘Trotcctivc Committees and Agencies for Holders of De- 
faulted Foreign CJovcrnmcntal Bonds,” pp. 105-106. 



Taxation by Private Organization 289 

I told you that here are five men, as you can construe this thing, 
looking at it legally — there are five men, we will say, have gone 
into a joint venture, wc will call it, and they have contributed 
capital to the joint venture with the hope, possibly, of making a 
profit. That is the possibility they take.® 

Promotional services were thus recognized as legitimate 
charges against the depositing bondholders. For example, a 
member of a committee, on being questioned about compen- 
sation supposed to be due to a certain Mr. Rosenblatt, whose 
sole services had been to promote the committee, testified as 
follows : 

Q. . . . Nevertheless, you thought he was entitled to a finder’s 
fee or promotional compensation. 

A. He was entitled to something. 

Q. How would you describe it, for forming the committee.^ 

A. Entitled to something for forming the committee. 

Q. Bringing in the business.? 

A. Bringing the members of the committee together. 

Q. That is, he was entitled to compensation for organizing the 
committee? 

A. Yes.^^^ 

The report of the Securities and Exchange Commission 
adds this pertinent comment: *‘It does not appear that any 
disclosure was made to the bondholders of this agreement 
for the payment to William Rosenblatt of a finder’s fee for 
originating the committee.”^^ 

Trading profits were also a motive, since membership on 
a committee gave information about the future of the nego- 

® Idem, Part V, “Protective Committees and Agencies for Holders of De- 
faulted Foreign Governmental Bonds,” p. 130. 

'^^Idetn. Part V, “Protective Committees and Agencies for Holders of 
Defaulted Foreign Governmental Bonds,” p. 138. 

Idem, Part V, “Protective Committees and Agencies for Holders of 
Defaulted Foreign Governmental Bonds,” p. 139. 



290 T he Folklore of Capitalism 

tiations with the foreign country to which no individual 
bondholder had access. This was condemned but there was 
no effective means to prevent it. 

Thus a situation of anarchy was created in which the help- 
less bondholder often had to choose among a number of 
committees, with no assurance as to the kind of treatment 
he was to receive and little remedy for any abuse of the com- 
mittee’s power. The success of the committee depended on 
its power to lure in the bondholders to deposit their bonds. 
Here all sorts of advertising devices were resorted to. First 
there was the use of prominent names. University professors 
served, thus lending to the enterprise the prestige of their in- 
stitutions. We quote from the testimony of the counsel for 
the committee for the Republic of Colombia External Dol- 
lar Bonds : 

Q. Why did you want a public figure? 

A. Someone who — 

Q. Who would attract depositors? 

A. Occupy the dual function of being able to secure the de- 
posit of bonds and to be of sufficient importance as the head of 
the committee to secure the respect of the Colombian gov- 
ernment. 

Q. Largely, then, prestige, here and abroad? 

A. That is correct. 

Q. Do you recall discussing the desirability of obtaining a 
college professor with Mr. Rosenblatt? 

A. We had a number of discussions concerning the desirability 
of securing people who would be qualified to examine into the 
debt problem of Colombia, and I believe that it was a matter of 
discussion that some well-known economist would be a proper 
member of the committee. I don’t recall the specific mention of 
these gcntlcmen.^^ 

Idem, Part V, “Protective Committees and Agencies for Holders of 
Defaulted Foreign Governmental Bonds,” p. 172. 



Taxation hy Private Organization 291 

Referring to the protective-committee situation in gen- 
eral, the Securities and Exchange Commission report reaches 
the following conclusion: “The foreign field (like the do- 
mestic) abounds with examples of greed, overreaching and 
excessive practices.”^^ The report recommended the forma- 
tion of a central authoritative agency, along the lines of an or- 
ganization which had been functioning in the field for some 
time, known as the Foreign Bondholders Protective Council. 

It is not the purpose of diis book to discuss the remedies in 
this tangled situation, but only to make two comparisons. 
The first is a comparison between so-called “waste” of gov- 
ernment and the so-called “efficiency” of private organiza- 
tion, which is not supposed to “cost” anything because it 
pays its own way out of profits. The second is the comparison 
of the patronage and political techniques of these private 
organizations, theoretically removed from politics, with 
those of the so-called corrupt political machines. It is easy 
to observe that both organizations use the same methods. 
The difference is only in the standards which were applied 
to them. Since political machines are necessary evils, they are 
held up to much higher standards. Operating under a phi- 
losophy that everything would work out all right if only it 
were left alone, and that inefficiency and waste would cure 
themselves because the investor had free will not to deal with 
organizations guilty of permitting them, business institu- 
tions could gather in vastly more money than political ma- 
chines under the protective slogan that if they were interfered 
with Capitalism would disappear. Persons who attacked the 
waste of private organizations were thus made to appear as 
radicals opposed to our fundamental social structure. The 
reality of the free will choice which the investor was sup- 

Idem, Part V, ‘Trotcctivc Committees and Agencies for Holders of 
Defaulted Foreign Governmental Bonds/* p. 739. 



292 T he Folkjore of Capitalism 

posed to have between efficient and inefficient organizations 
is illustrated by the testimony of Mr. George E. Roosevelt in 
a hearing before the Joint Legislative Committee of New 
York State which has been noted before: 

Q. So when a bondholder finds himself in the predicament as 
the holder of a defaulted bond, what choice has he? 

A. Practically none. 

Q. He can go in, or stay out? 

A. And if he stays out, they bring on foreclosure, bid as little 
as possible, and he gets a small distributive share. 

Q. And if he goes in? 

A. He takes just what the committee wants, 

Q. And in many cases he cannot get out once he is in? 

A. Exactly. 

Q. And there is no supervision over this committee that you 
know of under the law? 

A. No.^^ 

Often the ritual by which these levies were made became 
very complicated indeed, due to the fact that the concentra- 
tion of financial power in a few hands compelled the actors 
to double in so many conflicting roles that it was difficult to 
tell them apart. Let us examine a levy made to build sugar 
factories in Cuba directly, instead of through the foreign 
government. Cuban Cane, a great sugar corporation, elected 
to its board of directors one Charles Hayden, an investment 
banker of New York. Charles Hayden, the director, con- 
ducted negotiations with Charles Hayden, the investment 
banker, in order to induce him to float a loan to finance the 
company in Cuba and to head a syndicate of bankers. He 
succeeded. 

By this ritual bonds were issued and sold. Years after- 

Uem, Part III, “Committees for the Holders of Real Estate Bonds,” 
p. 96. 



Taxation by Private Organization 293 

wards, when the bonds were about to become due, it ap- 
peared that they could not be paid. Charles Hayden was then 
chairman of the board of directors of the sugar company and 
in that position represented the stockholders. He was also 
head of the investment house which sold the bonds and in 
that position owed an obligation to the bondholders. He was 
also a director of the Chase National Bank and the New 
York Trust Company, who were substantial creditors, and 
in that position owed an obligation to the creditors. 

There came a time when financial disaster to the company 
seemed imminent. The question arose as to what these dif- 
ferent personalities named Charles Hayden should do under 
the circumstances to protect the banks and those holding 
securities in the sugar company at the same time. Being a 
man of quick action, Mr. Hayden came to the following de- 
cision : He wrote a letter to the president of one of the prin- 
cipal bank creditors, the Guaranty Trust Company of New 
York, addressing him as ‘‘Dear Bill,” and advising him to 
insist on getting security for the bank indebtedness of the 
bondholders.^® In other words, at a meeting held with Mr. 
Charles Hayden’s compound personalities, the banker won 
out over the chairman of the board. The reason for this vic- 
tory puzzled Mr. Abe Fortas, who was conducting the ex- 
amination. He asked: 

Q. . . . Let me ask you this, Mr. Hayden, did you think that 
that loan for 1928 and 1929 should be secured because you felt 
that a receivership was or might be coming? 

A. Not in the slightest. 

Q. But you made the suggestion to the banks, and I am trying 
to get this fact perfectly clear on the record, you made the sug- 
gestion to the banks here that the line of credit which they ex- 

ldem» Part H, “Committees and Conflicts of Interest,” p. 457. 



294 ^ Volhjorc of Capitalism 

tended to the company and which had theretofore been unse- 
cured should now be secured ? 

A. Because of an approaching maturity of a bond issue Janu- 
ary 1, 1930, or at the end of the year, the calendar year, and there 
would be three months after the end of the fiscal year. 


Q. Let me interrupt you just a moment. Mr. Hayden, if the 
banks were given security, their claims would be prior to the 
claims of the debenture holders.'* 

A. Correct, and should be. 

Q. Now, Mr. Hayden, you have said here in this letter that 
the banks were looking to you for complete protection at all 
times on their loans? 

A. Correct. 

• • • • » 

Q. Didn’t you feel that the debenture holders were looking to 
you for the protection of their investment? 

A. I did, and excuse me for smiling, but there is not the 
slightest difference or conflict there in any way, shape or 

form. . . . 

• • • • * 

Q. For some reason the claims of the banks in your opinion 
were entitled to more solicitude on your part than the claims of 
the debenture holders ? 

A. Not at all, but they were entitled to a different method of 
treatment, not more solicitude. 

Q. A better class of treatment? 

A. No more solicitude, not at all. 

Q. Mr. Hayden, would you assume the banks would look at 
the report and would be generally familiar with the circum- 
stances of the company before making the loan? 

A. I would. 

Q. Why did you feel it necessary that you suggest to the banks 
that they take security? Why didn’t you just inform them of the 



Taxation by Private Organization 295 

facts? Why didn’t you just let them read the facts for them- 
selves? 

A. Because of the fact that I am very proud of a record of 44 
years as a banker, and that I did not ever try to put anything over 
on anybody. 

Q. A person does not usually go to a bank and say, “You have 
been extending us unsecured credit for a long time, but I think 
in view of facts A and B that you ought not do that now; you 
ought to make us put up security for loans.” That is highly un- 
usual, isn’t it? 

A. Not at all. It is something I have done all my life, and 
shall always do as long as I remain a banker. 

Q. But the banks made those loans on an unsecured basis be- 
fore you wrote that letter? 

A. I can’t answer that.^® 

This proposal to save the bank as a method of saving the 
creditors of the company is only valid in the dreamworld of 
fiscal thinking. In the real world banks tend to foreclose 
when there are about enough assets to pay off their loans, 
and to advance more money only when it is a requisite to 
saving the stake already in the venture. In 1934 the banks 
regretfully found it necessary to take over the company. The 
company was then deprived of credit and the ritual of reor- 
ganization commenced. 

No one was more active in this reorganization than Charles 
Hayden. He felt it was his duty to the customers of Hayden 
and Stone, on whom the capital levy had been made. There- 
fore, we now see him in a new role, that of chairman of the 
reorganization committee of Cuban Cane. As chairman it 
was evident to him that more cash had to be raised to put the 
company on its feet. The question was: Who should pay it 
in? Obviously, not the bankers, because it was no longer a 

Idem, Part II, “Committees and Conflicts of Interest,” pp. 459-462. 



296 The Fol\lor€ of Capitalism 

banker’s loan. Therefore it was up to the investors. There- 
fore Charles Hayden sent out circulars to stockholders, talk- 
ing of a reorganization plan and asking for more money in 
order to save what they had already put in. The amount, had 
it been subscribed, would have bailed out the banks, but the 
plan failed.^^ 

In the meantime, Charles Hayden appeared in a new and 
even more fascinating role — that of a free-born American 
citizen speculating in whatever securities he chose to specu- 
late in. Deprivation of that right leads to tyranny, bureauc- 
racy, regimentation, and what not — all of them dangerous to 
the American way of living. Therefore, Charles Hayden 
bought and sold the securities which he represented as chair- 
man of the reorganization committee, with the idea of mak- 
ing a profit thereon.^® However, he made it clear at a hearing 

Idem, Part II, “Committees and Conflicts of Interest,*' p. 486. 

“Q. The inducement for you to go on this protective committee was 
the possibility of making a profit by buying and selling? 

“A. Not at all, and I won’t allow you to distort my remarks that way. 

“Q. I am not trying to, 

“A. You have, I am sorry. I say I would have the same rights as any 
other free-born American citizen, and I should not be debarred from doing 
that because I was willing to give my time, labor, and brain power to 
serving on a committee. I would ask no more privilege than an outsider 
but the same privilege, or I wouldn’t serve on such a committee. 

“Q. Well, that is, you want some return for your time, thought, and 
ability. 

“A. Not at all. I cannot permit you to distort my remarks that way. I 
say I want the same rights as any other free-born American citizen who is 
not on the committee, which is to use my own knowledge and buy and 
sell as I want; and if I can’t continue to buy and sell if I went on a com- 
mittee I wouldn’t serve on one. . . . 

“Q. Do you think a committee member could be compensated for his 
activity, brains, and initiative, and energy, by regular compensation? . . . 

“A. . . . it is my opinion that there would be shyster lawyers and 
small bondholders who would go to the Federal Court or State Court and 
say, ‘How is it possible that this person’s brain is so valuable that he 



Taxation by Private Organization 297 

conducted by the Securities and Exchange Commission that 
in no way did he take advantage of the superior sources of 
information to which he had access as chairman of the re- 
organization committee. He denied that a person with such 
information and knowledge of the pending announcement 
of a plan was in a strategic position to trade in bonds. Re- 
ferring to certain sales made under such circumstances, he 
said: 

Q. Those sales [in May, June and July] were before any an- 
nouncement to the public of that proposal? 

A. It may be a coincidence. . . . It is the most far fetched 
thing in the world to try to take these dates and figure that there 
was some occult mind that knew some concrete thing and was 
quick on the trigger. You can think it but there isn’t an atom of 
truth in it. 

Q. It is a fact that this plan had nothing to do with it? 

A. Not in the slightest, directly or indirectly, as far as my 
transactions were concerned. 

Q. Do you recall the occasion for the sales? 

A. As I have explained to you many times, I might have 
woken up that morning, as many fellows did, and saw some- 
thing else that I thought would go up a great deal faster. . . . 
I am sorry, but I am willing, if it gives you any pleasure, to have 
you make all the inferences you like regarding morals or char- 
acter, but I can only tell you my transactions were those of a 
speculative investor on the New York Stock Exchange, not 
based on inside information but based on the way I happened to 
feel the particular day I made the transactions. . . . 

Q. . . . You say yourself it is diflScult to remember four or 
five years back and I appreciate that. But I was wondering how 

should get a fee of $25,000 or $50,000,* or some other sum. And I do not 
believe that people would serve on those committees if the right that every 
other American citizen has who isn’t on the committee were taken away 
from them.** (Idem, Part II, “Committees and Conflicts of Interest,** pp. 

341-342.) 



298 T he Fol\lore of Capitalism 

you could be so sure that it was not the advent or the prospect of 
a plan. 

A. Because I think that is such a petty detail in the life of a 
speculative stock on tlie Stock Exchange. . . . 


All my purchases and sales of these securities were based on 
cither my opinion of political and economic conditions in Cuba, 
which I gathered from the daily newspapers and nothing else, 
or the general conditions of the New York Stock Exchange which 
made me feel that I could reinvest my money better. 

Q. And the prospective plan that was in draft form in May 
and not announced until August had nothing to do with it? 

A. It had no more effect on it than whether some fellow threw 
a cigarette stub out that window. . . . 

Q. You can be sure that that was not the cause and you can’t 
be sure of what was the cause? 

A. That is absolutely correct. 

Q. How can your memory be so clear on one thing and not 
on the other? 

A. No difficulty whatever. I can tell you if there was an eclipse 
of the sun at seven minutes past eleven but I can’t tell you the 
date although I knew there was going to be one. 


Q. Doesn’t it strike you as a strange coincidence that this 
large liquidation took place before July 1931, then the plan was 
announced, and then the large substantial purchases took place 
shortly after the announcement of the plan? 

A. . . . There was no transaction made by me based on the 
likelihood or the unlikelihood of the plan going through. . . . 

Q. . . . the only thing that sticks in my mind is the fact that 
while these sales were taking place from May to July, you were 
wholly aware of the prospective plan of the Eastern Cuba Cor- 
poration. 

A. That may be your conclusion, but the thing that surprises 
me is I don’t see why all these fellows ask me to be a director 
when I am such a terrible fellow as you like to bring out. . • . I 



Taxation by Private Organization 299 

am willing to cooperate with you but you are trying to make 
these coincidences.^® 

Under such guidance a great sugar industry had been cre- 
ated in Cuba. It had been paid for by contributions by Ameri- 
can investors which originally amounted to about seventy- 
five million dollars, represented by twenty-five million in de- 
bentures and approximately fifty million in stock. In 1929, in 
the process of a former reorganization, these investors had 
contributed more money in order to save what they had put 
in. In 1934 they had been asked for another contribution, 
which only a few had been willing to make, under another 
reorganization plan. The final wind-up of this capital levy 
for the benefit of the sugar industry is shown by the follow- 
ing testimony: 

Q. Mr. Hayden, from your own acquaintance and association 
with this industry and your knowledge of the sugar industry, 
would you say that today the five banks that for all practical pur- 
poses now own this sugar company — 

A. Yes. 

Q. Have represented in that sugar company an investment 
which is — 

A. $7,000,000. 

Q. $7,000,000? 

A. Yes. 

• • • • • 

Q. That is, the five banks arc in — 

A. They are. They own it. 

Q. And the old investors — 

A. Are out. 

Q. And the old stockholders in the securities of this com- 
pany — 

A. Are out.^® 

Idem, Part II, “G^mmittecs and Conflicts of Interest,” pp. 322-323. 

Idem, Part II, “Committees and Conflicts of Interest,” p. 486. 



300 T he Folklore of Capitalism 

It was thus that private industrial government obtained its 
revenues to build and maintain its organization. This was 
not a malevolent process; it cannot be charged with positive 
dishonesty. It was an inevitable result of thinking of these 
great organizations as individuals trading in a free market 
with their customers and their investors, without public re- 
sponsibility. The levies which these organizations made on 
their retainers were fantastic and arbitrary because no one 
recognized them as levies, not because Charles Hayden or 
the bankers desired to be unjust to anyone. Even in the great 
depression realization of just what the process was doing to 
investors and to consumers came very slowly. The first re- 
action of reformers was that those in control of such organi- 
zations were bad men who needed more moral guidance. 
The picture of a reorganization as a sale was so firmly fixed 
that the first efforts at reform attempted to create by legisla- 
tive fiat fair trading in a situation where trading and efficient 
organization were incompatible. The idea of substituting a 
body publicly charged with responsibility toward its retainers 
involved the admission that here was a situation in which 
competition between traders did not work — which was con- 
trary to our whole business philosophy. Therefore, reformers 
sought legislation which continued this free-for-all fight but 
tried to make it conform to the Marquis of Queensberry rules. 

As a net result of these operations a huge sugar industry 
had been established by means of successive issues of paper 
currency called securities. Most of that currency had gone 
out of circulation and become valueless, but the factory re- 
mained. No one considered these transactions inflationary, 
or in any respect confiscatory. Most conservative people 
would have died in order to defend the right of private or- 
ganization to issue its own currency and to make its own 
capital levies. They would have done so, however, firm in 



Taxation by Private Organization 301 

the belief that it was the right of individuals which they were 
protecting. 

It should be noted that the process by which Cuban Cane 
built and operated its mills was almost identical in oudine 
with inflation on a larger scale in Germany. Germany issued 
all sorts of pieces of paper, from marks to municipal and 
government bonds, which were eagerly bought in this coun- 
try. The net result was that Germany, so far as its material 
wealth was concerned, was vastly enriched. Roads, apart- 
ments, parks, and all sorts of municipal improvements re- 
sulted from this process. The industrial plant of the country 
was enormously improved. When the smoke all cleared 
away Germany was found in a much stronger position so 
far as material wealth was concerned than before the infla- 
tion. In the same way the little principality of Cuban Cane 
was richer in material goods than before its inflation. Those 
who happened to hold the pieces of paper, whether issued 
by Germany or Cuban Cane, found themselves much worse 
off in comparison with others. Their sacrifices had gone to 
make these principalities richer in material wealth, but they 
were sacrifices just the same. The chief difference was that 
German inflation exacted contributions both at home and 
abroad, but Cuban Cane was almost exclusively confined to 
the United States in making its capital levy. 

This process, both in the case of Germany and of Cuban 
Cane, was destructive of the previously existing distribution 
of power and wealth. Nevertheless, it greatly increased the 
actual material wealth. It is important to note that in the 
climate of opinion in which the process was carried on it 
would have been impossible to increase the material wealth 
to the same extent by direct planning or taxation as by means 
of the disorderly process above described. A direct and 
planned increase of capital wealth which deprived investors 



302 T he FolJ{lore of Capitalism 

of their existing place in what Professor Laswell has called 
“the hierarchy of deference, income and safety” would have 
been impossible. The energies of both the German and 
the American people were so great that they could not be con- 
fined within a set of fiscal symbols. Yet, on the other hand, 
any planned or admitted organization of those energies was 
taboo. Development had to come tlirough sub rosa channels. 

Types of Private T axation 

Endless examples of this type of levy by private organiza- 
tions could be studied. The money sometimes went into use- 
ful, and sometimes into useless, public works. Many of these 
private public-works projects were self-liquidating. Others 
were not. There was no plan about it and no way of telling. 
However, by and large the small investor lost more than the 
large. The tax fell more heavily on those of moderate means 
than on the rich, because the latter were playing the game 
from the inside. They had influence with the taxing au- 
thorities. 

Take the example of Paramount Publix. Here fifty thou- 
sand so-called investors contributed to the greatest public- 
works project ever known in the amusement field. In this 
project there was a maximum of what in government would 
be called graft, but which in finance is recognized as legiti- 
mate tribute. Thus the directors voted themselves and the 
higher executive officers huge bonuses in order to encourage 
each other. The president of this principality took a salary 
and stock bonuses of more than a million and a half in 1930. 
The company lawyer got $75,000 a year and his assistants 
from $35,000 to $45,000. Kuhn, Loeb & Company, the bank- 
ers, received a huge present of stock simply out of gratitude.^^ 

21 *‘Q. Could you state what the occasion for this offering was? 

“A. Mr. Zukor and the other officers of the company had felt for some 
years prior to this and had so expressed themselves to Mr. Kahn and my- 



Taxation by Private Organization 303 

A list of relatives received fanciful sums for services of doubt- 
ful value. The whole story reminds one of the Court of Ver- 
sailles, distributing largess to its courtiers. 

There was nothing remotely resembling the profit motive 
described by Adam Smith in the conduct of this enterprise. 
It was more like the conquests of Alexander the Great. Mag- 
nificence was the keynote. These men were builders and 
spenders in a royal way, not commonplace traders. Romance 
hung over everything they did. 

self that they were indebted to Kuhn, Loeb & Company for many services 
outside of the selling of their securities. . . . 

“Now, Mr. Zukor had often said to Mr. Kahn he was indebted to him 
for this and would like to find some way of compensating him.** {Idem, 
Part II, “Committees and Conflicts of Interest,*’ p. 105.) 

Other typical expenses are shown by the following excerpts: 

“. . .we had an insurance department which had an executive com- 
mittee of its own, with premiums costing $600,000 a year. I was told — 
don’t know whether it was correct or not — we had never asked for public 
bids. So we asked for public bids and reduced the premiums that year by, 
oh, anywhere from 25 to 35 percent on our properties.** 

“. . .1 found that our telephone and telegraph charges had cost $800,- 
000 in *31 and that a great portion of that was for telephoning to Holly- 
wood. I found that the wire was open two, three, four hours at a time. 
Well, that intrigued me very much. So I made a telephone search and I 
took 100 and some odd telephones out of the Broadway Building that 
wercn*t necessary. I took telephones out of every theatre in America that 
the company owned that weren’t necessary. I instituted a system whereby 
everybody that used a long distance phone had to make out a voucher and 
state the purpose. I put a girl in charge of the telegraphs, both incoming 
and outgoing, to check the number of words, and I cut the $800,000 to 
$400,000 in 1932.’* 

“. . .1 found that the head of the legal department was in Europe on 
vacation when I came there. The company was having a lot of difficulties 
and I thought it was a strange thing for head counsel to be gone three or 
four months. He was getting $75,000 a year salary and his assistants were 
getting around $35,000 to $45,000 a year. I discharged — he resigned, and 
one of his assistants took the position at I think $35,000 or $40,000 a year, 
and these other assistants went on for $10,000 or $12,000 a year. We cut 
the expenses of the legal department from $800,000 that year down to a 
very reasonable amount. I don’t remember the amount any more.” {Idem, 
Part II, “Committees and Conflicts of Interest,** pp. 82-83.) 



304 T he Folklore of Capitalism 

Came the depression. Protective committees struggled for 
supremacy. Members of protective committees profited and 
traded. Great law firms examined thousands of legal opinions 
and wrote endless documents. And when the smoke had all 
cleared away, practically the same group was in control. 
This, of course, was inevitable. You cannot buy and sell or- 
ganizations like Paramount. They are the kind of activity 
in which people struggle for rank and power— not for “prop- 
erty.” A great tax had been levied on the American people 
to build an organization, to build theaters in little towns, to 
give them amusement. Had the Government tried it, it 
would have been met with bitter hostility. Columnists like 
Dorothy Thompson would have spoken about it as they 
spoke about bringing music to the mountaineers or employ- 
ing actors to give plays during the depression. The fact that 
there were only a few excellent pictures in comparison with 
the numerous worthless pictures would have been used as 
conclusive proof that the Government was hopelessly ineffi- 
cient. It was, in actual effect, a lottery tax which financed 
such public works as the Paramount Publix, and lottery taxes 
arc taboo in this country. 

The taxes levied by public utilities were of a somewhat 
more respectable character. Public-utility rates, since public 
utilities were an admitted monopoly, actually looked more 
like taxes to the users. Hence, here, to a greater extent than 
in any other field, the Government took control. Railroads 
and light companies were limited in the amounts which they 
could levy by way of prices. Men who would not have 
thought of Paramount Publix as a sort of government within 
government boldly talked about public ownership where 
utilities were concerned. Hence the taxes to be levied by these 
companies were regulated. On the investment side, however, 
prior to the depression, these corporations were looked at as 



Taxation by Private Organization 305 

private individuals. Even after the Insull collapse had 
wrecked the financial structure of Chicago and impoverished 
thousands, it was possible to build a great sentimental defense 
against the regulation of holding companies on the ground 
that regulation was a blow to freedom. On the investment 
side public-utility taxation was still a “private’' enterprise. 

The kinds of taxes levied by great organizations were as 
varied as the ingenuity of men. They operated a private mint, 
known as a stock exchange, which printed business currency. 
Sometimes this currency had substantial backing in terms of 
assets which could be bought and sold. However this applied 
only to smaller organizations. That type of asset in the nature 
of things could not exist in the case of an industrial empire. 
Its currency was necessarily fiat money, and for such con- 
cerns, the stock exchange was actually a private mint. 

The stock exchange was a convenience but not an essential. 
Certain companies made more direct levies by individual 
stock-selling campaigns. For example, the Federal Public 
Service Corporation, a holding company controlling a num- 
ber of municipal public utilities, widely scattered, sold pre- 
ferred stock directly to its customers. This had a double ad- 
vantage as is shown by the following testimony of its presi- 
dent: 

Q. What was the purpose of this attempt to sell preferred 
stock to customers of the company? . . . Was one of the pur- 
poses of that program to cultivate public relations? 

A. Yes; that would be one object in it. It was common practice 
with other companies to do the same thing. 

Q. Does that mean, Mr. Crawford, that, for instance, if a per- 
son has stock in a utility company he is unlikely to support an 
attack on its policies or an attack on its rates? 

A. Well, it might mean something like that.^^ 

Part II, “G^mmlttces and Conflicts of Interest,” p. 121. 



3o6 T he FolJ^lore of Capitalism 

Acquirement of good will in this way, of course, did not 
mean relinquishment of control. 

Q. Why didn’t you give them voting stock? Why give them 
preferred stock? Why didn’t you put them into the voting stock? 

A. Well, of course, there was never any voting stock sold.^® 

The personnel of the private tax gatherers used in this 
method of private levy was interesting: 

Q. I now show you, Mr. Crawford, a document which shows 
on its cover the heading “Stock Bulletin: 520 Shares. Welcome 
Home.” Then there is the picture of a cup. Can you identify this? 

A. Yes, I can. 

Q, Is this a bulletin that was sent around to the subsidiaries 
of the Federal Public Service Corporation? 

A. Yes, it is. 

Q. In connection with the preferred stock campaign? 

A. Yes. 

Q. I call your attention to the second page of text of this bul- 
letin, which contains a table headed: “The following table gives 
team quotas, total number shares sold, and per cent of quota, 
during the campaign just finished for October-November-De- 
cember, 1931.” Then under the heading “Teams” is listed “Wire 
chief.” Can you explain what that means? Was there a team 
composed of men who were wire chiefs? 

A. The chances are that was the wire chief’s department. 

Q. What is a wire chief? 

A. A wire chief is a person who is in charge of the wiring and 
reconnecting and all that sort of thing in a telephone office. 

Q. And they were selling stock? 

A. That is correct. 

Q. The installation department? What are they hired to do? 

A. That is a group hired to install telephones. 

Q. They were selling stock? 

A. That is correct. 

Part II, “Committees and Conflicts of Interest,** p. 122. 



Taxation by Private Organization 307 

Q. The traffic department? 

A. They have charge of the traffic, study the traffic and the 
control of traffic. 

Q. And they were selling stock? 

A. Correct. 

Q. Then, the team 7, accounting department. Those were men 
who were hired to do the accounting? 

A. A group in the accounting department. 

Q. And they were selling stock? 

A. Well, that refers not to selling, but to getting prospects. 

Q. I am not using the word technically. 

A. Yes. 

Q. The construction department? 

A. The same thing — 

Q. They were hired — 

A. To do the construction work. 

Q. Of what? 

A. Pole lines. 

Q. And they were selling stock, in the sense in which we have 
been using the phrase? 

A. Yes. 

Q. The commercial department. What were they hired to do? 
A. Well, the commercial department of a telephone company 
has to do with the new business, and that sort of thing. 

Q. And they were selling stock? 

A. Yes. 

Q. The equipment department? 

A. They handle the equipment, control the equipment, ware- 
houses, and that sort of thing. 

Q. And they were also selling stock? 

A. That is right.^^ 

It was all arranged like a game with cash prizes and cups 
and dinners and appeals to loyalty. The following bulletin 
shows how much fun it must have been for everybody: 


Part II, “Committees and Conflicts of Interest,” pp. 127-128. 



3 o 8 T he Folklore of Capitalism 

Points in the Big Game Hunt Will Be Figured as Follows: 

(It’s to your advantage to shoot big game — don’t be satisfied 
with only rabbits) 

[Look out for skunks! Deducts 5 points more than 
originally scored] 

A rabbit is a sale of i share and scores 5 points. 

A fox is a sale of 2 shares and scores 10 points. 

A giraffe is a sale of 3 shares and scores 20 points. 

A bear is a sale of 4 shares and scores 30 points, 

A tiger is a sale of 5 shares and scores 40 points, 

A lion is a sale of 10 shares and scores 100 points. 

An elephant is a sale of 20 shares and scores 250 points.^® 

[It should be explained that the skunks referred to above were 
purchasers who turned back their shares.] 

Such methods tapped a source not available through the 
stock market, as is shown by a bulletin of the company ex- 
plaining who were the best prospects, which reads as follows: 

The following is an analysis of the shareholders of a Western 
Utility which is comparable in size to Federal Public Service Cor- 
poration. 

In looking this over one can be guided as to who arc the best 
prospects to call on and sell our Preferred Shares. You will note 
that housewives and house-keepers, farmers, ranchers, retired, 
widows, and students are among those that buy the greatest num- 
ber of shares.^® 

Though not all direct-selling stock campaigns were so 
amusing, they nevertheless constituted a very effective 
method of collecting revenue. They had one disadvantage, 
however. This is illustrated by a letter written after it became 
apparent to the customers of Federal Public Service that their 
money was lost: 

When anyone mentions preferred stock to me I feel like dodg- 

Part II, “Committee* and Conflicts of Interest,'* p. 13a. 

Part 11 , “Committee* and Conflicts of Interest," p. 128. 



Taxation by Private Organization 309 

ing. This is a very serious subject. The thing that has kept us 
from having serious trouble with consumers who own stock in 
our company is that we have not told the people that own stock 
that their money is lost. You know that it just takes one person 
to do damage to either an employee or the system. This is a law- 
less place; the people do not think anything of a killing. We have 
something like 15 to 20 murder cases every court. Nothing is done 
with one for murder. I am serious when I tell you that for the 
good of the company the preferred stock holders must be taken 
care of. 

When you go to collect a bill and the party brings out some 
stock to pay with it keeps one nervous. I have been in some tough 
places myself having been shot some (to be exact) eight times. 
The next might be the one that would take me away. I want to 
keep all the consumers friends of mine and the company’s. This 
Preferred stock is dangerous.^^ 

Numerous other letters appeared in the Securities and Ex- 
change Commission report. However, we are law-abiding 
people and apparently nothing came of such threats. 

Of course, the taxation by great industrial organizations 
was not confined to the general public. Within their organi- 
zations they taxed their own retainers. Some corporations had 
a social-security program by which they sold their own stock 
to employees, deducting the price from their wages, so that 
these employees would have claims against the corporate 
government in their old age. It is astonishing how similar the 
first social-security act was to this. The notes which the Gov- 
ernment owed to itself were the “security” behind the first 
social-security act. In other words, those who paid for social 
security in effect bought bonds of the Government, which 
had promised to support them in their old age, after the pat- 
tern of the employees’ stock-benefit plan, because all the pro- 
ceeds of social-security taxes were supposed to be put in gov- 
ernment bonds. 


Idem, Part II, “Committees and Conflicts of Interest,*’ p. 156. 



310 The FolJ{lore of Capitalism 

One of the most interesting types of taxation levied is illus- 
trated by the Ford Motor Company financing. This type 
of taxation has become familiar in European dictatorships. 
Ford simply shipped cars to all his dealers with the demand 
that they pay for them or else their business would be con- 
fiscated. With the aid of local banks they paid. There was 
nothing else for them to do. Many of the Ford dealers worked 
all their lives to contribute to Ford. However, the similarity 
of these payments to a tax escaped the attention of men living 
in the dreamworld of fiscal thinking. They were considered 
a free and voluntary trade between a big man called the Ford 
Motor Company and a lot of litde men called dealers. 

These same pressures were found in the distribution of 
securities. Great issuing houses had a number of good things 
to distribute and a number of sour issues. If a dealer wanted 
the patronage of the great house, he took the sour with the 
good, and got the money back from the public if he could. 
The investor was supposed to protect himself by diversifica- 
tion, so that he would get a reasonable number of winning 
tickets in this lottery scheme of taxation. It was taken for 
granted that a substantial number of tickets would lose. 

The type of taxation involved in price combinations which 
charge all the traffic will bear is familiar enough not to re- 
quire development. Other types of levying tribute by private 
organizations are so numerous as to defy classification. We 
are not here sitting in judgment on the way great industrial 
organizations grew. A world of trade between independent 
individuals gradually became an industrial feudalism. It was 
an active, vital, picturesque culture, producing, as all cultures 
do, the peculiar types of saints and sinners we have been 
describing. It should be remembered by the critical reader 
that saints must always be in the minority or they would not 
be saints. 



CHAPTER XII 


The Malevolence of Taxation hy the 
Government 

In which is discussed the curious myth that permanent public 
improvements, conservation of resources, utilization of idle labor, 
and distribution of available goods are a burden on posterity if 
accomplished by an organization called “government” which as- 
sumes public responsibility. 

T he net result of a folklore which gave business all 
these agreeable and painless ways of levying tribute 
was to give business enterprise complete freedom. 
To this may be attributed our industrial development. As we 
have seen, successful organization requires a folklore which, 
instead of hampering it in meeting its practical problems, 
allows it freedom to experiment. Nevertheless, the same folk- 
lore which justified freedom to experiment on the part of 
industrial organizations offered the greatest handicap to 
similar activity on the part of the Government, even in fields 
where governmental activity was most imperatively needed. 
It set up standards by which the Government was judged by 
its failures, while an industrial organization was judged by 
its successes and its failures were excused. 

This belief in the inherent malevolence of government re- 
sulted in a fiscal fairyland in which the following proposi- 
tions, absurd though they were from an organizational point 
of view, appeared to be fundamental truths. 

I. If government conserves our soil from floods and ero- 
sion in order to bequeath to posterity a more productive 
country, our children will be impoverished thereby and have 
to pay for it through the nose. 



312 The Fol\lor€ of Capitalism 

2. I£ government builds a large number of productive pub- 
lic works which can be used by posterity, posterity will be 
worse off. 

3. We cannot afford to put available labor to work because 
that would burden posterity. 

4. We cannot distribute consumer’s goods now on hand, 
because that would burden posterity. 

5. The less government does about controlling money and 
credit, the more orderly in their operation they become. 

6. Credit inflation and depressions would be even worse 
than they are if government attempted to control them. 

7. When a problem arises which concerns the production 
of goods, the question “Where is the money coming from?” 
is more important than “Where are the goods coming from ? ” 

Therefore, we do not improve our country, or conserve its 
resources, or utilize its labor, or run its productive plant to 
its maximum capacity — out of consideration for our grand- 
children. 

What is the reason for the common feeling that we cannot 
afford to make such admitted improvements if they involve 
government spending, in the face of the fact that, from a 
common-sense point of view, they are both necessary and 
capable of producing income? The answer to that question is 
found in the fact that the Government possesses no accept- 
able bookkeeping to convey to the public the idea that such 
expenditures are a source of future wealth. 

Private organization is protected from criticism of its ex- 
penditures by two important myths. The first is that any 
money which is wasted is “private” money and therefore of 
no concern to anyone. This is accomplished through the 
personification of the great industrial organization and has 
already been described at length in the preceding chapters. 

The second important underlying myth which aids pri- 
vate organizations and hampers government activity along 



The Malevolence of T axation 313 

practical lines is the notion that the government has no “as- 
sets.” When a private corporation spends money incalculably 
in excess of its current income for years to come, it neverthe- 
less is able to “balance its budget” on the theory that it is ac- 
quiring “assets” in return for that expenditure. Therefore, it 
is not “spending” but “investing” in income-producing capi- 
tal goods. These goods include assets without any tangible 
existence. The organization itself becomes its own greatest 
asset and its expectations and hopes are given money value. 
Even such current expenditures as advertising are considered 
an asset, because they are “income” producing. Advertising 
good will becomes a thing in itself and one of our national 
assets when the sum total of corporate assets are listed in 
terms of their money value. The fact that often (as in the case 
of many drug and food products) this advertising is in reality 
a social liability, which taxes the income of persons of mod- 
erate means by inducing them to pay tribute for useless 
things, does not prevent it from being protected as valuable 
private property is protected. 

So fixed is this asset mythology in our current folklore that 
insolvent organizations like railroads can make themselves 
solvent by spending. The process is as follows : An insolvent 
railroad spends vast sums for luxurious equipment. Its in- 
creased activity increases its morale. The public observing 
that activity gains confidence in it. Wealth, as we have 
shown, is nothing more than a present-day guess as to what 
goods and services an individual or an organization can con- 
trol in the future. The organization spending on a large scale 
raises hopes; men begin to believe in it; its stock goes up in 
value; its hopes are reflected in its bookkeeping; thus it be- 
comes solvent. All it needs is enough money to pay its inter- 
est, and that in turn can be obtained through the increasing 
confidence of the public in the value of its “capital.” Our 
mythology regards this “capital” as something which is 



314 Folklore of Capitalism 

permanent, having an existence apart from the organizationi 
and capable o£ being sold for the benefit of creditors if the 
organization fails. 

Because private industrial organizations have assets, pos- 
terity does not need to pay if they raise money by borrowing. 
The money will be repaid from these “assets.” If it is not 
paid, the banks making the loans will suffer, but they will 
deserve it since they were free to withhold the loans. The 
public may suffer incidentally, but that is not the fault of the 
system, since it produces the very best kind of bankers pos- 
sible by eliminating those who are foolish and lose money. 
In the hands of good bankers the national wealth is increased 
by the creation of assets which are liquid and have a money 
value based on their prospect of producing income. 

The Government is not permitted to use the techniques of 
bankers in order to make its property liquid and to give it a 
money value. It is not supposed to “own” any property which 
can be capitalized in that way, and if it does, it must turn it 
over to private financial organizations. For example, a police 
department renders services as necessary to the community 
as a news-gathering agency. Our mythology does not allow 
such an activity to be “capitalized” and operated under cor- 
porate bookkeeping. Everything which the police depart- 
ment does is written down as a necessary expense. It can 
never balance its budget without a subsidy from the tax- 
payers because we are unable to conceive of the Government 
as selling police protection. Private schools may capitalize 
their organizations and make money; public schools cannot. 

So deep-seated is this notion, that the Government can 
only with the greatest difficulty raise money on assets which 
everyone admits it owns. For example, the Government 
owned the oil under the Salt Creek field in Wyoming. It was 
compelled, however, in following the ideology of the time, to 
“lease” the right to extract oil to private companies, reserving 



T he Malevolence of Taxation 315 

a small royalty. This was in effect a present of untold mil- 
lions of dollars to private oil companies. The leases acquired 
from the Government became worth fabulous sums. The oil 
was wasted in fantastic ways. Nevertheless, the Government 
was not permitted to operate its own properties because of 
the certainty men felt that government is wasteful. (Inci- 
dentally, states could not tax these highly valuable oil leases 
within their boundaries because that would have been in 
effect “taxing” the Federal Government.) 

The same thing was again illustrated when the Govern- 
ment attempted to use the water power in the Tennessee 
Valley to produce electricity. Sound conservative lawyers 
thought it unconstitutional. Sound conservative economists 
were sure it violated economic principles. The matter finally 
reached the Supreme Court. In fear and trembling as to the 
possible consequences of its decision on posterity, that learned 
tribunal, confining its decision to the narrowest possible 
limits, determined that the manufacture of electricity on the 
particular dam in question was justified under the war 
power.^ Fantasy can go no further than this. Yet few saw any- 
thing ludicrous in the decision, in spite of the fact that it left 
the other dams built by the Government in connection with 
the T.V.A. still subject to continued and protracted litigation. 

Of course there are instances where the Government has 
operated on an asset system of bookkeeping, for example, 
when it used the symbol “government corporation.” Such 
disguise of government activity, however, was hampered in 
every direction by current ideals, because a “government 
corporation” involved so many ideological contradictions. 
Everybody “saw through” the device of a government cor- 
poration and said that it was just a method of concealed 
“taxation.” This was when the governmental corporation 

^Ashwander v. Tennessee Valley Authority, 297 C 7 . 5 . 288 (1936). 



3 16 The Folklore of Capitalism 

did not ‘‘make money.” When It did “make money” It was 
“governmental interference in business.” Government was 
by theory so inefficient that it could never make money in 
business. If it did, it made money at the expense of private 
business, because it caused private businessmen to lose “con- 
fidence” so that they could not make any money. This loss 
of confidence, according to these myths, prevented private 
bankers from loaning businessmen the necessary “private 
funds.” If the Government instead of a bank “loaned” them 
the funds, that led to “inflation.” Uncontrolled private credit 
was not thought to be the cause of the inflation of 1929, or if 
it was, government credit would have led to more inflation. 
If anyone argued that properly controlled government credit 
might not lead to inflation, the answer was that credit could 
not be so controlled without changing our system of govern- 
ment. This the Constitution forbade, either because of its 
letter or spirit. Any new thing, even though not forbidden 
by the Constitution, acquired a character of unconstitution- 
ality because new government activity was thought to lead 
to a “change in the system of government.” The reason for 
this was that the “spirit of the Constitution” was more im- 
portant than the letter. 

Not only was the Government prevented from raising 
money pleasantly by the device of capitalizing its “assets,” 
but in levying taxes public opinion demanded that it act as 
disagreeably as possible. Concealed taxes were regarded by 
liberals and conservatives alike as dangerous. They were the 
kind of things which “politicians” were trying to put over in 
order to spend money and get votes. The “thinking man” 
was not supposed to be fooled by this sort of thing. Direct 
taxation was the best, because people “felt” it and this made 
them think twice before voting for a government which in- 
dulged in “waste.” All this was simply a subconscious re- 
action to the notion that private organization was the only 



T he Malevolence of T axation 317 

right and proper instrument to distribute goods. Of course, 
it had nothing to do with waste. No one suggested that a 
method of advertising and pricing be recommended which 
would make people think twice before permitting slums to 
be built, or useless skyscrapers, or duplications of competitive 
equipment, or gadgets. The principles of “waste” did not 
apply to business at all, because of the theory that “waste” was 
automatically eliminated by competition. No one had the 
faintest idea what social “waste” was anyway. What was 
one man’s “waste” was another’s efficiency. These words 
simply reflected the social organization’s instinctive attack 
on anything which disturbed the existing order. 

The effects of this way of thinking on the “science” of 
taxation were most amusing. The rich wanted to broaden 
the income-tax base so that the poor would vote against 
public improvements. Liberals were against any form of taxa- 
tion which the public would not “feel,” because they shared 
the mythology that in this way they would impede useless 
government spending on projects favored by the rich. For ex- 
ample, the sales tax was condemned because it fell on the 
poor. In a world where prices were established by great 
private organizations on the basis of getting all possible 
profit, the cost of living in various states could never be 
charted by finding out whether there was a sales tax. Never- 
theless, the sales tax was opposed often by those who advo- 
cated greater public spending for the poor. They wanted the 
funds raised in the most disagreeable way. This belief re- 
stricted the Government’s activities. 

There were some odd quirks to this tax philosophy. To- 
bacco, for example, was not supposed to be a necessity for 
the poor. Neither were movies, nor gasoline, nor liquor. 
These were “luxuries” and if a man was so depraved (as is 
the writer) to be dependent on a moderate amount of all of 
them, this did not make them necessities even for him. Hence 



3 1 8 The FolJ^ore of Capitalism 

those who were opposed to sales taxes as a burden on the poor 
did not suggest removing them from cigarettes. Nearly all 
the poor smoked cigarettes, and to a confirmed smoker to- 
bacco is more important than a proper diet. However, there 
was just enough taint of immorality about the habit to en- 
able liberals to advocate a sales tax on liquor and tobacco 
and at the same time to be against a sales tax on food because 
it was a burden on the poor. 

Taxation morality, while it permitted collections from 
liquor and tobacco, refused to permit the Government to 
take anything by way of lotteries and gambling. There was 
nothing more obvious than the psychological need of the 
American people to gamble. Even churches recognized this 
method of raising revenue by conducting raffles. However, 
the Government was not permitted to tap that source, be- 
cause we were going gradually to eliminate the desire for 
this kind of speculation. The result, naturally, was to turn 
the filling of this need over to a sub rosa organization, which 
not only levied enormous tribute from the poor but did not 
even provide honest gambling. 

For example, no one can accurately estimate the annual 
“take” of the numbers racket and other gambling devices 
from the poor of New York City. Some people put it in the 
hundred millions. These games are dishonestly conducted 
and yet all efforts to suppress them fail. Not only does the 
Government refuse to utilize this pleasant and necessary 
activity as a means of raising revenue, but it spends huge 
sums on its prosecution. This drives the business down to 
lower and lower levels, because it becomes increasingly diffi- 
cult for people of decent values to engage in it. The whole 
complicated process is a product of the ideology which keeps 
government in its place by not permitting it to raise money 
in pleasant ways. 

According to current ideas, government should not tax 



T he Malevolence of T axation 319 

to subsidize needed industrial activities (except in “emergen- 
cies”), because this is an expenditure that will have to be 
borne by the taxpayer. However, if the tax can be correlated 
with a familiar symbol, it escapes this taboo. For example, 
the state has always built roads. Hence, government can 
spend billions of dollars in subsidizing the automobile in- 
dustry by making concrete roads to every hamlet for auto- 
mobiles to run on. Without this subsidy, the present develop- 
ment of the automobile industry would have been impos- 
sible. Compare this with the building industry. It is probable 
that today houses could be produced like Fords, by standard- 
ized production on a large scale. Yet building is slow in get- 
ting started, and, in spite of pressing demand, nonstandard- 
ized building material is the rule in the industry, and a bath- 
room costs more than a complicated machine like a Ford. It 
is probable that if the Government could subsidize a place to 
put these new houses, as it subsidized a place to put the auto- 
mobile, the industry might rebuild our slums and create not 
only a building boom but a pleasanter, more attractive coun- 
try with a higher standard of living. It is certain that the 
country would not be “poorer” if a few million more houses 
of good construction were built. Nevertheless, the subsidy to 
this industry by purchasing and preparing land cannot be 
given, as the road subsidy was given, since the myths of the 
time do not sanction it. We need slum clearance more than 
roads. It would pay for itself, as roads did. However, it is 
infinitely more difficult to start than the road construction 
was because the myths and portents of our folklore stand in 
the way. When we examine the entrails of our economic 
geese, such activities are attended by dire portents, unspecific 
as such portents always are, but nevertheless sounding in 
gloom. 

Of course the above will be considered by the economic 
scholar as too simple an explanation of the complicated set 



320 T he VolT^lore of Capitalism 

of social pressures which handicaps housing in this country. 
The criticism will be valid in the sense that in the present 
tangled situation a subsidy for land on which houses could 
be erected might not be an effective way of encouraging the 
development of cheap housing. Such a proposal might be 
twisted and distorted by strongly entrenched organizations 
and might result only in the further increase of land value. 
We are using it as an illustration, not as a legislative proposal. 
The practical objections to the present adoption of such a 
subsidy to advance better housing arise because of other fixed 
ideals which might prevent the subsidy from becoming as 
effective for housing as it was for automobiles. An examina- 
tion of all the psychological factors which complicate sen- 
sible real-estate improvement cannot be made here. 

What may be called ‘‘selfish vested interests” are important 
factors preventing change. However, such interests, unsup- 
ported by ideals and folklore, are not so difficult to defeat. 
Selfish interests cannot form powerful organizations if they 
frankly recognize that they are selfish and fail to tie them- 
selves up with some respectable social myth. For example, 
the selfish interests of hundreds of owners of office buildings 
were opposed to the construction of Rockefeller Center in 
New York, which drained them of their tenants. They even 
went so far as to commence a suit. However, their efforts 
were ineffective, because Rockefeller Center did not violate 
any current taboos. This fact prevented the opposition from 
uniting with any enthusiasm. They could not find a magic 
inscription with which to fight Rockefeller Center and there- 
fore could not give their selfish interests the color of a cam- 
paign for right, truth, and justice—^ven to themselves. People 
who fight for selfish interests, realizing that it is selfish in- 
terests they are fighting for, are always ineffective. They fail 
to get the support of loyal crusaders. They fail to be loyal 
crusaders themselves. Had it been the Government which 



T he Malevolence of T axation 321 

was erecting Rockefeller Center, it could have been ham- 
pered with real eflEectiveness at every turn, by the same group, 
which would have had the backing of all right-thinking men 
and women who desired to preserve their ancient liberties. 
The Government may build roads, but not buildings. 

Under such circumstances building through governmental 
agencies had to follow the traditional lines which confine it 
to the popular conception of public monuments and memo- 
rials. As this is being written, a controversy is going on in 
Washington on the advisability of cutting down the cherry 
trees in order to build a costly and useless memorial to 
Thomas Jefferson. The writer does not predict how this 
fight is going to come out. There seems, however, little pos- 
sibility that the memorial will take the form of a housing 
project. Housing projects, which are fitted to our conception 
of what the poor can ‘‘afford,” arc not considered sufficiently 
ornamental to perpetuate the names of great men. 

To be sure there are exceptions. The town of Coral Gables 
in Florida, with under 6,000 inhabitants, managed to acquire 
about $50,000,000 worth of improvements from speculators 
all over the country, part of which tribute was collected by 
municipal bond issues, and part by issuing the notes of a pri- 
vate corporation. In other words. Coral Gables got itself into 
the position of a sort of foreign government. It enlisted bank- 
ers on its side, paid them heavy tribute and built a very lovely 
city at the expense of people who lived far away. It then pro- 
ceeded to default and went through the protective-committee 
process in the orthodox way. The houses and hotels and 
swimming pools, however, remained in Coral Gables. The 
extravagance of Coral Gables met with universal condemna- 
tion, but that did not take away the buildings. 

This was the process by which some of our most important 
public developments were built. Chicago became one of the 
most beautiful cities in the world because it was fortunate 



322 T he Fol}{lore of Capitalism 

enough to have sub rosa political machines and politicians 
with an eye for municipal beauty and convenience. For a 
time Chicago was supposed to have been bankrupt, but this 
phase passed away, as it always does, leaving the magnificent 
boulevards, lake front, and other great public improvements 
for the enjoyment of its citizens. A thrifty city, living up to 
the standard principles of government, would have had to 
remain ugly and uncomfortable, because it followed sound 
principles of taxation and public expenditure. In other words, 
here again, in a climate of opinion in which mythology pre- 
vented government from doing obviously necessary things, 
they could only be accomplished by the creation of a sub rosa 
political machine. 

The general belief that taxes were a necessary evil, to be 
resisted so far as possible, turned the learning of taxation into 
an amazing and complicated metaphysics. There was no 
order, nor rhyme, nor reason. There was a mass of over- 
lapping taxing bodies, each representing some facet of the 
confused religion. There were conflicts between state and 
Federal governments, municipal governments, county gov- 
ernments, and corporate governments. The Supreme Court 
of the United States created huge reservoirs of tax-exempt 
securities by intimating that state bonds could not be taxed 
by the Federal Government. It created a great class of munici- 
pal employees who were exempt from income tax. By treat- 
ing corporations as individuals, courts produced the fantastic 
metaphysics known as nonrecognition of gain or loss in re- 
organizations. Corporate taxation became the most compli- 
cated metaphysics the world has ever known. Tax attorneys 
made great incomes because they became skilled in using this 
peculiar terminology. 

The collection of the income tax from powerful individuals 
and organizations became a combat, rather than a business 
transaction, in which forty-five thousand registered lawyers 



T he Malevolence of Taxation 323 

and tax accountants were pitted against some twenty-eight 
hundred persons employed by the Government.^ So strong 
was the belief in the essential malevolence of government 
that methods to avoid taxes became respectable which would 
not have been tolerated by the same group of people to avoid 
their private indebtedness. The Supreme Court of the United 
States, representing as it did protection of the great organi- 
zation against the predatory Government, provided the slo- 
gans for this contest. It held that tax avoidance was a per- 
fectly proper motive and attempted to distinguish it from 
tax evasion. It refused to condemn artificial and finespun 
technicalities as methods of avoiding taxes, except in lan- 
guage so vague as to be useless in preventing ingenious law- 
yers from concocting such schemes. 

The net result was that new loopholes in the income-tax 
laws developed as fast as old loopholes were closed. The 
principal method of tax avoidance in 1937 was for a rich in- 
dividual to split himself up into a large number of artificial 
personalities, none of which had sufficient income to come 
within the higher bracket. After these artificial personalities 
had been created, they proceeded to trade with each other for 
the purpose of establishing losses, rather than for making 
money, so that their taxes would be reduced. The courts were 
sympathetic and created a literature so vast that almost any 
scheme could be plausibly supported with learned authority. 
It was almost impossible to obtain a penalty for fraud in 
evasion of the income tax provided outright perjury was not 
resorted to. 

In 1937 the President called attention to these methods of 
tax avoidance and was met with a storm of protest on the 
ground that he was persecuting the rich. The tax investiga- 

2 Statement of Secretary of the Treasury Morgenthau at the Hearings 
before the Joint Committee on Tax Evasion and Tax Avoidance, 75th Con- 
gress, 1st Session, June 17-24, 1937. 



324 The Folklore of Capitalism 

tion which followed aroused little public interest and over- 
whelming editorial condemnation. It disclosed the fact that 
the very rich man was in the habit of making each recurring 
expense a separate taxable entity. He would incorporate a 
residence or his yacht. He would establish trusts for the edu- 
cation of his children. He would create personal holding com- 
panies to do his investing for him. The line between the 
proper and improper use of such a license was almost im- 
possible to draw. Cecil B. De Mille, a noted moving-picture 
director, incorporated himself and worked for the corpora- 
tion at far less money than was actually paid for his services. 
The balance was put into a corporate surplus to avoid sur- 
taxes and the whole scheme was upheld by the court.® This is 
a typical case and is given here only because the method used 
was so naive. Rich men incorporated in the Bahama Islands 
and in Newfoundland and in Panama in order to give their 
income a situs in a foreign country. 

When interviewed on the ethics of such transactions, Mr. 
J. P. Morgan said: “If the government cannot collect its 
taxes, a man is a fool to pay them.” His remark represented 
current business ethics toward the Government. No respect- 
able person could make the statement that if a ban\ was un- 
able to collect its notes, the debtor would be a fool to meet 
his obligations. In effect a sort of legalized bankruptcy pro- 
ceeding has grown up almost exclusively devoted to tax 
avoidance and made respectable by the current belief in the 
inherent wastefulness and malevolence of the Government. 
The right to fight long and expensive legal battles has be- 
come identified with human freedom, and on the banner of 
every great tax avoider is inscribed the motto “Taxation with- 
out litigation is tyranny.” 

Of course, one of the most important functions of the tax- 

* Commissioner v. Cecil B. De Mille Productions, 90 F. (2d) 12 (i 937 )‘ 



T he Malevolence of T axation 325 

ing power is regulation. Businesses and other activities can 
be encouraged or discouraged by this device. But since gov- 
ernment regulation was looked at with suspicion, taxes for 
regulatory purposes also became subjects of bitter contro- 
versy. The Supreme Court of the United States in the case 
declaring the Agricultural Adjustment Act^ unconstitutional 
developed the doctrine that the taxing power could not be 
used to control agriculture, because agriculture was some- 
thing which the Federal Government was not supposed to 
control; this sort of control interfered with states rights, the 
home, freedom, and our system of government. Other regu- 
latory taxes, such as one which prevented oleomargarine 
from competing with butter, were sustained.® One never 
knew just when a tax ceased to be a tax and became a penalty, 
but the net result was to add to the ominous cloud which 
hung over activity by the central government. The phrase 
“due process” further complicated the tax situation in un- 
predictable ways. 

There were, of course, other notions which exemplified the 
malevolence of government when it entered the field of tem- 
poral affairs. For example, all right-thinking people con- 
sidered it dangerous for a government department to select 
its own personnel. Civil service boards were thought to im- 
prove morality and increase efficiency in this regard. A super- 
visory court called the Comptroller General watched over 
all expenditure and constituted a separate little Supreme 
Court with power to stop all government activity in what he 
considered unauthorized paths. This officer also served to 
harass governmental employees in all sorts of minor ways by 
questioning their travel expenditures. The law did not per- 
mit government employees to live as well while traveling as 

^ United States v. Butler, 297 U,S. i (1936). 

^McCray v. United States, 195 U.S. 27 (1904). 



326 T he FolJ(lor€ of Capitalism 

the employees of great corporations. Government employees 
>vere limited to five dollars a day, on the theory that if they 
stopped at a good hotel the taxpayers would pay. If an em- 
ployee for a public utility stopped at a good hotel, this was 
none of the business of the rate payers. A poll taken by the 
Institute of Public Opinion showed that an overwhelming 
percentage of voters opposed the organization of govern- 
mental employees into a labor union. People generally were 
in favor of the humiliating provision of civil service boards 
and budget bureaus for government servants. They were 
against giving them the dignity of an independent union 
through which they could assert themselves as private labor 
could. 

The list of such things could be indefinitely extended. 
However, the central idea was that “government” does not 
spend its “own” money. It can have no assets. It cannot use 
corporate methods of balancing its budget. These were all 
incidents of the prevalent belief in the essential benevolence 
of private government. 

These attitudes became marked during the depression be- 
cause of the great pressures which compelled government to 
extend its activities in areas where private industrial organi- 
zation had failed. Such activity, colliding with the folklore 
we have been describing, created more spiritual discomfort 
than had been known since Darwinism collided with the 
Christian religion. Every priestly organization threw itself 
into the breach. The campaign of 1936 was a regular revival 
meeting in which supposedly intelligent men talked and 
acted with the kind of idiocy usually exhibited by scholars 
and intellectuals when they become excited. The Supreme 
Court of the United States courageously deserted all known 
forms of legal logic to throw itself into the economic breach 
and set the nation back on the proper social course. When in 
1937 the Supreme Court of the United States was attacked 



T he Malevolence of Taxation 327 

by Roosevelt, the din began all over again. Federal Judges 
got down from the bench and made speeches of which the 
following from Judge Otis is an example: “I shall not argue 
with one who says when the sun is burning in its zenith in 
an unclouded sky, ‘there is no sun.’ ... I cannot argue with 
one who thinks it right to pack a court, or stuff a ballot box 
or bribe a jury.”® 

Senator Wheeler in the heat of his passion to save the Gov- 
ernment from the formulation of a creed which would per- 
mit it to act effectively in practical affairs discovered that God 
himself was opposed to the judiciary reform bill of President 
Roosevelt. We quote from the New Yor\ Herald Tribune 
(July 15, 1937) : “The Senator from Montana, Burton K. 
Wheeler, took the last word on that today when, amid the 
chorus of tributes and praises, he called upon the President 
to drop his fight for the court bill, ‘lest he appear to fight 
against God.’ ” 

Such emotional outbursts have attended every issue which 
threatened to extend government activity into the area sup- 
posed to be reserved to private organization. The same sort 
of oratory was used successively against the Securities and 
Exchange Act, the legislation on the gold standard, the 
N.R.A., the A.A.A., as in the debate on Roosevelt’s judiciary 
reform bill. For example, in speaking in the famous gold 
clause case^ Mr. Justice McReynolds pronounced the follow- 
ing priestly curse from the bench of the Supreme Court of the 
United States : “Nero undertook to exercise that power. Six 
centuries ago in France it was regarded as a prerogative of 
the sovereign. ... It seems impossible to overestimate what 
has been done here today. The Constitution is gone. . . . 
The people’s fundamental rights have been preempted by 
Congress. Some day the truth will be seen.” 

®From an address delivered by Judge Otis, February 12, 1937. 

7 Perry v. United States, 294 U.S, 330, 1935. 



328 T he Folklore of Capitalism 

All of the above sounds like an attack on individuals and 
attitudes, but it is not intended to be such. It is idle to attack 
the human race for being what it is. Heated and extreme ex- 
pressions are inevitable whenever men are going through a 
spiritual conflict between actual needs and an inherited folk- 
lore. Indeed this language may be considered as an encourag- 
ing sign, because it clears the way for the resolution of the 
conflict. It offers the same kind of release as profanity does in 
minor situations. It is one of the symptoms which always ac- 
company the death of a taboo. 

For example, the struggle for procedural reform in Eng- 
land during the last century, and the present conflict in the 
American Medical Association caused by proposals for sen- 
sible public'health administration, though their subject mat- 
ter is entirely different, are accompanied by the same type of 
argument. Such arguments represent the catharsis by which 
a people are slowly abandoning an old religion. The process 
by which that catharsis is accomplished is this: Respectable, 
learned, and conservative people keep on shouting, gradu- 
ally getting more and more extreme until their words have 
no meaning whatever. As the emotion gradually exhausts 
itself, the realization that their statements are nonsense gradu- 
ally dawns on the debaters. Then the struggle is over. The 
typical excerpts which we have just cited indicate that in 
1937 this stage may have been reached in the United States. 
If not it is certainly on the way. 

In the confusion created by the last-ditch defenders of the 
faith in the essential malevolence of government, a clear note 
of common sense is beginning to be heard. The National Re- 
sources Board, which in 1935 published a report that was 
practically unnoticed, produced in 1937 a study on the effect 
of new inventions and new industrial techniques which was 
startling in its implications. It was typical of a fact-minded 
literature which was growing in extent and compelling men 



T he Malevolence of T axation 329 

to face practical problems with a view to solving them by 
new organizations. 

To be sure, in creating new organizations to solve these 
problems the old attitude refused to recognize that such or- 
ganizations are the product of growth. Organizations, like 
any army, are necessarily inefficient when they are formed. 
Yet the standards of the day require that a governmental or- 
ganization should be mature when it is born. Standards for 
private organization are more practical. They recognize that 
the United States Steel Corporation today is a gradual de- 
velopment from complete anarchy. They realize that a large 
number of automobile companies had to rise and fall before 
the present highly effective combinations appeared. This 
thinking is possible through the symbolism of private prop- 
erty. The notion is that nobody “pays” for the mistakes of 
private organizations, except the investors, the laborers, and 
the purchasers, and that their loss is not a tax but is something 
due to their own fault for investing in, working for, and pur- 
chasing from, the particular organizations. In the case of gov- 
ernmental organization, every mistake is a tax on posterity. 

Actually, the progress of any organization necessarily be- 
gins with a vague idea of the sort of enterprise which is to 
be undertaken. Then follows a constant change in the de- 
tails by which the objective is accomplished. Legislation 
which grants a charter to a new activity cannot be a blue- 
print of the future. Its only function is that of a sort of politi- 
cal platform. Had Henry Ford, when he started, tried to 
follow a blueprint of what he thought organization would 
be today, he would have failed within a year. This simple 
fact is, naturally, not observable to those caught in current 
folklore about government waste. For example, as this is 
written a wages and hours bill is pending in Congress. What 
the exact terms of that bill are is probably just as unimportant 
as the picture which Henry Ford had of his future organiza- 



330 T he Fol\lore of Capitalism 

tion. The important thing is to get the idea accepted and an 
organization started. Amendments to the bill will follow as a 
matter of course. The first function of such legislation can 
be only to give an organization a respectable place in which to 
begin the necessary fumbling which all growing institutions 
have to go through with. 

As an example of the first stage of that process, we quote an 
editorial from the New Yor\ Times which shows a growing 
acceptance of the role of governmental organization. 

THE DOCTOR AND THE POOR 

With hospitals facing a crisis because heavy taxation has curbed 
philanthropy and with doctors called upon to treat the needy 
at least partly at their own expense, some form of State medicine 
is inevitable. But if the indigent are to be treated at public ex- 
pense organized medicine runs the risk of falling under official 
control. Hence the search of the American Medical Association 
for a policy which will enable it to maintain its present position, 
yet participate in Federal and State plans (June 9, 1937). 

You will note, however, the typical reaction to the old 
myths. What does the New Yor\ Times think is the cause of 
our present health situation ? The effect of heavy taxation on 
private philanthropy! Nevertheless, the editorial shows that 
the practical nature of the problem has invaded the sanctuary 
and is troubling the priests. This is the first step in the accept- 
ance of a public-health administration by an organization 
with public, instead of private, responsibility. 

The importance of such first steps often goes unrecognized 
by liberals who do not realize the handicaps which attend 
the beginning of a new activity by an institution which has 
never considered that activity as part of its function. Institu- 
tions, like individuals, acquire the characters given to them 
by the public. When they embark on a new field in which 
they are supposed to be incapable of acting efficiently, this at- 



T he Malevolence of T axation 33 1 

titude robs them of confidence and morale. They try to con- 
form to old forms; they are afraid of common-sense, practical 
measures. A period of self-justification and fumbling is in- 
evitable, and during that period the acceptance of the idea 
is much more important than the details of its attempted exe- 
cution. 

Conservatives on the other hand see in the acceptance of 
the idea the acceptance of every possible logical implication 
which their imaginations can conceive of. Thus child-labor 
regulation leads to unlawful searches and seizures, and pub- 
lic-utility regulation leads to tyranny. Those who are work- 
ing in such political situations must expect, therefore, not 
only attacks from their enemies, but also from their friends. 
Practical action in a new field always alienates both the con- 
servatives and the radical groups, who stand side by side at- 
tacking it. During the last campaign, when Republicans were 
distributing notes against the Social Security Act in pay en- 
velopes, the Nation brought forth a leading article on the 
act entitled “Social Security Betrayed.” It was all part of the 
struggle which had to attend the beginning of practical ac- 
tion in this field. 

When a notion is finally accepted as a commonplace thing 
for the government to do, management becomes more im- 
portant than logic, and the inherent organizing ability of a 
people gradually gets under way while intellectual conserva- 
tives and radicals battle over something else. 



CHAPTER XIII 


The Social Philosophy of Tomorrow 

In which the author plays safe and refuses to be specific. 

S INCE I am writing in an age where Reason is still 
king, it is not sufficient to describe social institutions 
as one describes the organization of an anthill. Ants 
have no souls and we are writing this book for men who do 
have souls. Therefore something must be said to point out 
what men should believe in order to make them better, more 
cooperative, more just, and more comfortable. No one writ- 
ing oh social organization can escape the demand that he 
formulate a social philosophy. Not only does the demand 
come from others, but the writer himself is so much a part 
of the culture of his own time that he feels uncomfortable if 
he fails to produce a platform of principles on which he can 
stand in order to repel attacks. 

And yet, if we look backward over history, we can see how 
impossible it is to stand in one age and predict the social 
philosophy of the next. On what basis could anyone in the 
Roman Empire predict the peculiar philosophy of feudal- 
ism.^ How could the wisest man in the twilight of the Middle 
Ages have predicted the philosophy which glorified the 
trader and made human greed the fountain of justice and 
morals.^ How would it have been possible to have foretold 
the development of the great modern corporate organization 
out of a philosophy of rugged individualism.^ Even Adam 
Smith, who described his own time so accurately, stated with 
complete conviction that the development of the great cor- 
poration was economically fmpossiblc because men would 



The Social Philosophy of Tomorrow 333 

not work for corporations as they worked for themselves. 
Unless the profit motive is to disappear, he argued, such or- 
ganizations will be absolutely impossible, because of the un- 
derlying factors which make up “human nature.’’ 

So today, in the most highly org^anized and specialized 
society the world has ever known, men are convinced that, 
except in time of war (and we are going eventually to abolish 
war) centralized control by organizations which do not 
operate on the “profit motive” will lead to inefficiency, bu- 
reaucracy, tyranny, and worse. 

And the curious thing is that so long as men think that 
way, the development of the new organizations always 
proves that they are right. Great corporations were actually 
inefficient in Adam Smith’s day and the best work was done 
by individual craftsmen. Centralized governments today 
actually are tyrannical, bureaucratic, cruel, and so on. Ger- 
many, Russia, and Italy do not present attractive pictures of 
the world which is supposed to be created when a nation fol- 
lows a consistent ideal. 

However, one of the reasons that we are always able to 
prove our point, as Adam Smith did, is that our philosophy 
makes us judge the institutions which do not violate that 
philosophy by their successes and those which do violate it 
by their failures. Sweden is a much pleasanter country to live 
in today than Germany. Yet the nor^rofit enterprises in 
Sweden, such as cooperatives and those sub s idized by gov- 
ernment, are the very things which we are sure would pro- 
duce in this country conditions like those in Germany and 
Italy. A philosophy of government is a series of parables 
through which men see the world before them. Today the 
parable of the wild Russian, or the cruel German, has an emo- 
tional relevance which the parable of the bright Swede can- 
not have for us. Instinctively we explain away the success of 
Sweden on the ground that the Swedes are a homc^neous 



334 ^ Folklore of Capitalism 

people or whatnot. (Some of the Balkan states are also homo- 
geneous peoples.) 

This selection of parables is part of the process of judging 
institutions which fit into our philosophy by their successes 
and those which do not by their more obnoxious aspects. This 
is the way we judge the comparative efficiency of govern- 
ment activities and the activities of great organizations. We 
escape from facts which contradict our theprics„by saying 
on the one hand, “One must not be fooled into condemn- 
ing the good corporations by the bad,” and on the other 
hand, “One must not be fooled into believing that a few in- 
stances of governmental efficiency are any excuse for its 
numerous failures.” 

In this climaite of opinion the new nonprofit organizations 
which struggle to fill social needs against a background of 
rriyths which deny them a respectable place go through the 
confusion we have been describing in this book. While they 
are engaged in this battle for r£Cognition they necessarily be- 
come very much like the little pictures which men have of 
them. This is true with the individual personality. It is also 
true of the institutional personality. If everyone says that any 
particular government department is a useless bureaucracy, 
those who work for it will be affected and it will begin to 
look like a bureaucracy of the kind it is supposed to be. All 
sorts of human elements will contribute to this result. The 
most efficient young men will use the bureau only as a step- 
ping stone to more respectable pursuits. Then the govern- 
ment trains many of the lawyers who subsequently fight 
against it. Those who stay will become timid and avoid 
positive action by reciting principles which to their enemies 
will look like red tape. 

In any combat situation each side will always look like 
villains to Ihe other. And under these pressures each side 
wrilTecdme Tffie villains they are pictured to be, because 



The Social Philosophy of Tomorrow 335 

of the necessity of fighting fire with fire and villainy with 
villainy. 

Any group of high-minded people which begins a right- 
eous war against oppression will soon find itself compelled 
to use the cruel tactics of the oppressors. Thus atrocities on 
both sides will occur. Thejbest fighters are never ggjatle 
people. If a situation is created where fight^S . are, essential, 
they will use^fighting tacdcs. The gentle righteous people 
for whom they are fighting will be compelled to justify these 
tactics on some grounds or other. There are only two ways of 
doing this. The first one is the great principle that thejej3,d 
justifies the means. The second is to deny that these tacfics 
are being used at all. A choice between these two lines of de- 
fense will depend on the ternpcrameat q£ the individual and 
his a udi ence, but the mutual atrocities will go on regardless 
of which defense is used. Peaceful combat has its atrocities 
not less renowned than war. In the country of the bliad 
man who can see is always classed as a radical or a cynic. 

Thus a government institution which everyone insists is a 
bureaucracy bound by red tape will become like a bureauc- 
racy bound by red tape. A political machine which does the 
practical work which those devoted to principle insist is no 
part of the business of statesmen will look like the kind of 
thing that respectable people think a political machine 
must be. 

This is inevitable. It accompanies the struggle of every 
new organization to attain a respectable place. It is part of 
the confusion which accompanies^grdwfh. But before con- 
demning it as a "bad thing” it should be remembered that in 
this world (which looks so queer and paradoxical when 
viewed through the eyes of that logical little man, called 
Reason, in the top of everyone’s head) the~sffu^le against 
a prevailing folklore is the very thing which makes the new 
organization strong — ^which binds it together. No nation, 



336 The Folklore of Capitalism 

no social institution, ever acquired coherence^ w 
sort of a fight. Out of the fight coine its myths and its heroes. 
Situations in which there is no conflict, and in which men 
do the practical obvious thing that makes them comfortable, 
do not create that hierarch^jof divinities for which men stage 
reverent parades. The Civil War gave unity to this country, 
and today strong men sing songs and weep tears over the 
union which was cemented by the war between the blue and 
the gray ; and they praise the gray as much as they do the blue. 
The experience with the N.R.A. is an illustration on a smal- 
ler scale that a labor movement does not obtain coherence 
when collective bargaining is granted by the government 
while labor rests on its oars. The C.I.O. has obtained its mil- 
lions because of the romance of a great combat. Institutions 
seem curiously like individuals in this respect. The individ- 
ual for whom all struggle and conflict has been carefully 
ironed out generally develops into a jellyfish. 

Therefore, the social philosophy while institutions arc 
growing is necessarily characterized by extreme, contradic- 
tory statements of principle used in the series of conflicts 
which accompany growth. Men do not fight and die except 
for extremes. It is for this reason that in times of social 
change, when new organizations are struggling for a respect- 
able place, we find that social philosophy is made up of op- 
posing Utopias. Men cannot fight over practical things. They 
do not march and parade and develop their heroes in a com- 
mon-sense atmosphere. Every age has its social philosophy; 
otherwise it would not develop organizations. The social 
philosophy of the United States today is that of a great battle 
in which both sides are fighting each other to attain the same 
end. The sum total of law and economics which is the litera- 
ture of our social philosophy today must represent the two 
sets of prindples heTd^by'dppbsm camps, in order to justify 
the struggle. Even the RepuiDlicans fighting to save America 



T he Social Philosophy of T omorrow 337 

in the last campaign did not regard the Democrats as traitors 
or rebels. Both parties regarded the other as unspeakably 
wrong, and yet they had to justify a system which gave the 
wrong, the illogical, and the immoral side a chance to win. 
Therefore, opposing beliefs lumped together composed the 
confused social philosophy of the age. 

In times when the emotional conflict is not so keenly felt, 
social philosophy appears more consistent and less confused. 
Its inconsistencies are concealed by ceremony or literature, 
instead of emphasized an^ brought rht6”'fhe open by 
battle. This is what is meant by a “rule of law.” Yet the term 
“rule of law’* would have no meaning except for organiza- 
tions which had previously developed a mythology and a 
hierarchy of divinities through a combat. 

The social philosophy of today, as in all periods of combat 
between new institutions and old, is^the philosophy of a war 
to end war. The sum total of its slogans offers an arsenal of 
weapons with which each side can attack the other. What 
of the social philosophy of tomorrow? To what set of for- 
mulas, since we all need ip^mujas, should the readers of this 
book give their allegiance? 

In the first place it is necessary that the philosophy of any 
social institution be positive and not negative. When legal 
and economic doctrines become purHy negative, when they 
are designed solely to defend against fancied, dangers, they 
are on their way out. Let us examine this formulation with 
reference to the familiar Supreme Court controversy. 

That distinguished and revered priesthood (and we mean 
no criticism of the Supreme Court by this observation) had 
up to the time of the last election been devoting itself almost 
exclusively to protecting the American people from their un- 
holy desires. The Constitution had become a hair shirt, 
through the wearing of which salvation could be attained. 
A bare maiority of the Court appeared to regard any 



338 The Folklore of Capitalism 

extension of government power as something fraught with 
grave danger. Three dissenting justices consistently opposed 
this policy of obstruction. They felt that the Constitution, if 
it were to survive, w^ have to become a sermon of hope 
rather than a ritual of gloom. They tried to express a faith 
in national government through their dissents. However, in 
the bitterness of the controversy, the very fact that these jus- 
tices could survey the activities of new governmental organi- 
zations without either indignation or p^nic created alarm 
in the rest of the Court. Things went so far that the learned 
Justices actually began calling each other names in public in 
scholarly language from the bench. The Court lost its at- 
mosphere of Judicial calm. After the election of Roosevelt it 
ceased, in its majority opinions, to represent that reconcilia- 
tion^of^conflicting ideals which had heretofore made it the 
grea^es^ symbol of our national unity. Large groups of people 
in the United States began to regard the Court as their enemy 
rather than their impartial judge. 

Of course, there were a lot of logical distinctions and nice 
reasonings back of the two opposing attitudes in the Court. 
However, the learned details were actually unimportant. In- 
telligible and plausible briefs could be written on both sides 
of the political questions which the Court was deciding, even 
in spite of the fact that the majority in writing each decision 
tried to settle the questions once for all. The Supreme Court 
of the United States, which was once the repository of a gen- 
erally.aQcepjL?d social philosophy, reacted in a time of conflict 
as such bodies always react. When governmental philoso- 
phies became a source of controversy, they provided a set of 
opposing slogans for each warring group. This always hap- 
pens in all theologies. Perhaps it was chance that the majority 
of the Court was fighting for the old world that had disap- 
peared and only the minority recognized the new one. Yet 
if one observes the history of similar institutions, one finds 



The Social Philosophy of Tomorrow 339 

that this is the rule, not the exception. Tl^ conflict in the out- 
side woirld pipduced the conflict in the Court. And always in 
sucTTconflicts respectable institutions hang back, frightened 
by the exuberance, the lack, of respect for old Jandmarks, and 
the surge forward of heretofore unrecognized groups which 
accompany change. 

However, it should not be forgotten that the Court fur- 
nished slogans for both sides. The greaLppmioja^.Q^^ Jus- 
tice Stone in the A. A. A. case gave positive philosophical au- 
thority to government participation in die production „and 
distribution of ggods. The opinion had fire and enthusiasm. 
It wa^ an offensive weapon of great potential force against 
the complete denial of national power by the majority of the 
Court. The footnotes which accompanied the opinion were 
like the engraving on the handle of a revolver: they make the 
gun a prettier instrument, without interfering with its utility 
as a weapon. That opinion, though of course not intention- 
ally designed for such a purpose, became the biWe ol those 
who enlisted in President Roosevelt's attaclTdh the Court. It 
owed its power not to^ its learning but to its moY.irig^xh<y:oric. 

In this situation it was inevitable that the purely negatjye 
philosophy of the majority Imally became imten^ There 
were only two possible outcomes to the proposal of the Presi- 
dent. Either the Court would change or there would be a 
new Court. Observers generally credit Mr. Chief Justice 
Hughes with the political skill which accomplished the 
ch^ge. It is represented in two opinions, one sustaining the 
minimum-wage law for women and the other permitting 
the Wagner Labor Relations Act to be applied to the Jones 
and Laughlin Steel Company. 

These opinions represent a transition from a negative to a 
positive philosophy of fcderal^ower. They are technical and 
uninspired. However, they dm clear away the underbrush. 
They showed that the Court was capable of ch^^^^ 



340 T he Folklore of Capitalism 

Finally, there appeared Mr. Justice Cardozo’s opinion in 
the social-security caje. Here was a note of hope and positive 
affirmation. It was again more a matter of rhetoric than any- 
thing else, because the ideas were commonplace enough. 
However, in the Jones and Laughlin case the Court seemed 
to be saying that it was sorry but it could not find anything 
in the Constitution which prevented the Wagner Labor Re- 
lations Act from applying to the Jones and Laughlin Steel 
Company. In Mr. Justice Cardozo’s opinion the Court 
seemed to be saying “Hurrah! This is the kind of thing the 
fathers positively intended Congress to do under the Con- 
stitution.” 

Here we have, on a small scale, a way in which new social 
philosophies appear. There is first the battle, with the fight- 
ing speeches on both sides. Then there is the reconciliation 
with the past. And finally there is the inspirational synthesis 
of a new point of view. The social-security decision did much 
to restore the prestige of the Court because of its note of posi- 
tive affirmation. Without it the writer has little doubt but 
that Roosevelt’s Court plan would have been quickly passed. 
The Constitution appeared for the first time in years to be 
leading, instead of obstructing us, in our use of national 
power. All these decisions were, to be sure, written in the 
heavy language of the law. The social-security decision and 
the dissenting opinion of Mr. Justice Stone, however, used 
that language in such a way as to create a nevv atmosphere 
around old words. These decisions are not significant apart 
frbnTthe combat which created them. The ideas which they 
propound will appear very commonplace when the decisions 
are read twenty years from now. But their significance will 
not be affected by that fact. 

Of course, social philosophies have no significance at all 
except with reference to the conflicts out of which they arise, 
or to the institutions which they support. We have already 



The Social Philosophy of Tomorrow 34 ! 

shown that the logical structure is unimportant. Hitler sub- 
scribed to Socialism, but he could have done the same things 
under the Mormon Bible i£ the words in that Bible had had 
emotional relevance to the German people. 

Therefore, if one wishes to guess the social philosophy of 
the future, he must guess first what class will come into con- 
trol of the organizations which make and. distribute the 
goods and, second, whether the change will be violent or 
slow. If it is violent, a whole new set of terms will dramatize 
the sudden rise of the new organization to power. The old 
terms will flow back gradually during a period of confusion, 
while the new organizations fumble and fail as organizations 
always must fail to live up to the promises of their creed. And 
finally a note of positive affirmation will be heard which, like 
Lincoln’s “Gettysburg Address,” seems to link the new or- 
ganizations to some heroic event in the past, to express the 
contradictory notions and ideals of the people, and to J&ll 
them with the pride and morale necessary for expansion. 

If the rise of the new organization is_slow, the termjjyill 
change their meaning, rather than be supplanted by new 
terms. Capitalism will become “socialistic” in a slow revolu- 
tion. In a more violent one, “Capitalism” will be supplanted 
by “Socialism” and then in the period of stabilization “So- 
cialism” will gradually become “capitalistic.’^This is what 
is happening in Russia. We can note today the charge being 
constantly made by those who were most idealistic about So- 
cialism in Russia that the Communists are abandoning their 
ideals and “reverting” to Capitalism. In contrast to this we 
heard speeches ad nauseam in the last campaign that the New 
Deal was in devious and hidden ways making our capitalistic 
system socialistic. The observer who watches this process 
should never be alarmed about the “stupidity” of the so-called 
intelligent people who make speeches of this kind. It ii^p^t 

of the process, cxf change in a All he needs to 



342 T he Folklore of Capitalism 

worry about is the character of the people who are gradually 
com Trig into power. Does he think that they are good or- 
ganizers and at the same time tolerant and humajiitarian? 
If He reaches this conclusion, he neeJ not worry about “failure 
to balance the budget.” All “balancing the budget” ever can 
mean is that an institution has achieved public acceptance 
of its o^ectives. If it has, there will never be any difficulty 
about balaricing its budget. 

If the observer wants to guess whether we will balance 
our budget by “taxation” or by the Government’s adopting 
the techniques of bankers and creating “assets” to which it 
can give money values, he must first realize that anything 
he predicts is only a guess. There are no economic “laws” on 
this point. Then he should study the culture of the people, 
remembering that unpleasant methods of collecting revenue 
will never be permanently adopted as the principal tech- 
niques of successful organization. People in this country dread 
taxes and love financing. Unless this attitude changes, new 
government activities will be financed in all probability by 
asset bookkeeping. If, on the other hand, the attitude toward 
taxation does change, it may become the means of budget 
balancing as it has in England. The writer's guess at present 
is that the Government will continue to tax and gradually 
increase its participation in finance. It is already moving in 
both these directions today. There are signs of acceptance of 
taxes somewhat heavier than we have had in the past. There 
are also many signs of the Government’s becoming the great- 
est credit agency in the country — in other words, learning 
and using the techniques of bankers. 

This much only about the social bookkeeping of the future 
the writer can say with confidence. In the first place, it will 
personify whatever organizations achieve a stable place in 
the distribution of our goods. In the second place, it will not 
be descriptive of actual conduct because practical situations 



T he Social Philosophy of T omorrow 343 

will always require deviations from doctrine. Therefore, lib- 
erals will again rise to importance, as they do in times when 
a settled governmental philosophy is accepted with unques- 
tioning faith. Liberal movements always die in a time when 
the fojWpre- is questioned. They rise again when men think 
they know what the eternal verities are, and therefore can 
find a firm platform from which to attack the continual back- 
sliding from those verities. 

In the third place, the social bookkeeping of tomorrow 
will be supported by that same attitude which we call today 
'Haissez jaire” economics. All this means is that those who 
defend institutions against logical attacks which cannot 
easily be answered in logical terms necessarily have to de- 
velop an argumentative technique which protects them 
against continual reform. The best and easiest rnethod is to 
develop a philosophy which justifies letting existing institu- 
tions atone, even when they are violating principle. Of course, 
laissez faire is just as Utopian as Socialism. Human beings 
in power cannot let things-akaie, no matter how much they 
believe in that philosophy. But just as some form of creed 
based on abstract sociaTjuatice will always be the battle^ry 
of tfi e ref ormer, so some sort of creed based on letting things 
alone will always be the answer to a demand that an insti- 
tution be compelled to practice^ what it preaches. Injustice 
obviously must always existfiecau^e without it the concep- 
tion of justice has no meaning; and without the ideal of jus- 
tice human activity loses all appearance of dignity. 

It is a hopeful sign that there is beginning to appear a, phi- 
losophy about social philosophies. I will attempt no list of 
writers with this point of view because there are so many 
today who are looking at social philosophies from the out- 
side, recognizing the part they play and at the same time 
using them. Men are coming to realize that political govern- 
ment is necessarily a dramatic spectacle, that games are really 



344 ^ Folklore of Capitalism 

important in the growth and development o£ institutions, 
and that these games can be controlled. Even at the height of 
the last campaign the bitterness was softened by the realiza- 
tion that a play was being staged. This is a new thing in our 
political thinking. It holds the promise of giving us greater 
control over our ceremonies and creeds, without losing any 
of their emotional drive. It is, of course, hard from the point 
of view of the rational naan, to regardjaw and economics as 
folklore and at the same time play seriously a game which 
depends on tlie use of the formulas of these sciences. Yet we 
have already accomplished this feat in our treatment of emo- 
tional maladjustments of individuals. 

This point of view toward governmental institutions is 
easier for the unscrupulous to take than for respectable 
people. It is an essential to success in building a political or- 
ganization in America. In Russia, Germany, and Italy, where 
old ideals were suddenly swept away, a certain necessary 
realism has compelled these governments to recognize that 
the political party is always the real government. They there- 
fore dragged political machinery out into the open and made 
the political leader the nominal as well as the actual governor. 
This enabled them to use political techniques more frankly 
and openly. Trials became an admitted method of political 
propaganda. In this country the trial of political issues by the 
Supreme Court of the United States, while it was actually 
political propaganda, was supposed to be something else. The 
failure of the unfortunate conservative bloc of the Supreme 
Court of the United States to realize that they were actually 
deciding political issues came near to wrecking the Court. 
The Court was finally compelled to make a public reversal 
of its former attitude which would have been unnecessary 
had the majority known, as Mr. Justice Stone knew, the limi- 
tation qn the judicial function. A most useful social philoso- 
phy for the future is one which recognizes the functions 



The Social Philosophy of Tomorrow 345 

which dramatic contests o£ all sorts perform in giving unity 
and stability in government. The most primitive type of such 
contests is war. The most civilized types are garnes and judi- 
ci^ irial. The frank recognition of this fact is the beginning 
of^nowledge of social institutions". Tt gives m understand- 
ing of the“pS that footbali teams play in the growth and 
traditions of a college, and the similar part that such an in- 
stitution as the Supreme Court of the United States plays in 
the growth, tradition, and unity of a nation. 

For^ an illustration of all this, we close with a quotation 
from Walter Duranty: 

Joseph Stalin, you must understand, is building Russia — making 
men out of mice and putting courage, backbone and unity into a 
people that have been slaves for centuries. That is Stalin's job 
which Lenin set foF him and while Leon Trotsky talks^ about 
vyorld revolution Stalin is t^ing to do 

The job has two essential factors — to bind together this vast 
country with its multifarious and multilingual races and to give 
them a common cause, aims and hopes. America, in a sense, has 
the same problem — what is called the melting pot — of assimilat- 
ing former Europeans into the integrated life of the United 
States. 

That is comparatively easy, but in the U.S.S.R. there are 
seventy-nine major languages and hundreds of dialects and to 
make a^soup of this mixture requires a skilled cook. 

Toda^we saw how Stalin brews his broth. Five young girls 
from Buriat, Mongolia, on the edge of China, came into the sport 
stadium Dynamo, which is the headquarters of the Soviet Physi- 
cal Culture League. In 137 days they had covered 4,000 miles and 
their plump, cheerful faces today adorn the front pages of Mos- 
cow newspapers. 

Two arc quite pretty and one, who is only 17 years old, has the 
most attractive and serious small face. With them in the photo- 
graphs there is a tall Russian man, who “ran the trip.” And that 
is the answer to Stalin’s soup. The Russians and the Russian Com- 



346 T he Fol\lore of Capitalism 

munist party arc training, driving, badgering and busding these 
backward 170,000,000 people to make them men, not mice or 
slaves. 

Thirty thousand people at the stadium cheered uproariously 
when the Mongol girls came in. They felt a vicarious pride in 
the girls* achievement, because it was done for Russia and as a 
tribute to “Women’s Day” on Monday. 

You can say this sounds like nonsense, but when Charley A. 
Lindbergh flew the Ad antic vyoren^’i.you thrilled? That is how 
the Russians feel and how Stalin is solving the national problem 
here. These Mongolian kids and the welcome they received in 
the Soviet capital are symbolic and tremendously important be- 
cause it means a new Russia which is one and undivided. 

And there are new games of skill and courage, like ice hockey, 
for a people that were slaves and knew no games. After the 
arrival of the Mongolian girls the final men’s and women’s 
championship hockey matches were played. The rules allow no 
body checking, which makes the game slow to any one who has 
seen American hockey. But it is a hot struggle and the crowd 
went mad. That is the way they are building this new Russia. 
(New Yor\ Times, March 7, 1937.) 

When Stalin recently abandoned this technique for a great 
purge, the morale and prestige of Russia fell. International 
opinion realized that Russia, for some inexplicable reason, 
was failing in organizational methods, in spite of the evi- 
dence of the internal power which such a purge represented. 

Games of this inspirational character may be played by dig- 
nified old men reciting the parables of the law, as well as by 
young girls. It is the essential of a properly dramatized civili- 
zation that there be dramas to suit all nioods and y^stes. The 
Supreme Court of the United States, Memorial Day, and 
Charles Augustus Lindbergh are the stuff out of which, vital 
and expanding social organizations arejmade. 



CHAPTER XIV 


Some Principles of Political Dynamics 

2n which a science about law and economics is distinguished 
from a science of law and economics. 

T he last six chapters have been devoted to an analy- 
sis of various myths connected with the personifica- 
tion of our great industrial enterprises. These par- 
ticular ceremonies are fundamental to our present disunited 
industrial feudalism. They are the most important psycho- 
logical factors which are now hampering the growth of or- 
ganizations with a definite public responsibility. The use of 
the individualistic ideal to justify dictatorial business institu- 
tions is also one of the greatest obstacles to considering the 
real problems of freedom of the individual. 

We believe that this folklore is on the way out. Its artifi- 
ciality is becoming more and more apparent, and the need 
for new types of organization justified by a different folk- 
lore is growing more pressing each year. We are today in 
the midst of the confusion which inevitably accompanies the 
growth of these new organizations. No one can say how long 
it will last. Yet there are certain general observations which 
may be made, and which are applicable to all types of organi- 
zation. They will not serve as the basis for any infallible pre- 
dictions. They will only give us the kind of understanding 
of social institutions which makes it possible to discard ir- 
relevant factors in making predictions or diagnoses. These 
generalizations will be the subject of our final chapter. 

In making these generalizations we are handicapped J3y 
the lack of a terminology. There are no adequate terms to 
describe the study of modern social institutions, either from 



348 T he Folklore of Capitalism 

the point of view of an anthropologist studying a primitive 
tribe, or from the point of view of a psychologist observing 
a psychopathic 4^rsonality* Our general literature of law and 
economics is forced to leave out what it calls “politics.” This 
pressure on these sciences necessarily creates a theological 
terminology which is difficult to use for the purpose of mak- 
ing observations. 

One might think that anthropology might be a descriptive 
term for a study of modern religion and political forms. It 
will not serve, however, because the anthropologist stops at 
the solemn threshold of law and economics, convinced of his 
unworthincss to proceed. He says in excuse, “I am no econo- 
mist or lawyer.” The Supreme Court of the United States 
has for years offered a more fascinating study in primitive 
ritualism than anything that the Malaysian tribes had to of- 
fer. The American Law Institute, composed of a group of 
men sitting around and doing responsive readings of the law, 
financed by the Carnegie Foundation, has never been ade- 
quately described. The American economic scholars meeting 
in Chicago every year have never been visited by observant 
men asking themselves the pertinent question : “Why should 
such apparently intelligent men, when gathered in a group, 
attempt authoritatively to conceal the facts about political 
institutions?” The study of the reaction of social organiza- 
tions to the formulas produced by such bodies, and the effect 
of the general folklore on those formulas, have not been given 
a classification or a name. There are of course novels and 
biographies which have attempted the job of describing the 
moving force of economic and legal folklore, but they have 
done this at odd times and not in an orderly scientific study, 
since they were written for a public rather than for a labora- 
tory. The serious anthropologist and the serious psychologist, 
seeking information rather than literary effect, have left their 
own culture severely alone. There are, of course, exceptions, 



Some Principles of Political Dynamics 349 

but they are few enough so that they prove the rule. They 
have passed by law, economics, political machinery, depres- 
sions, inflation, business confidence, Fascism, Communism, 
and all the various principles and systems of government as 
if they were the business of someone else. Neither the “an- 
thropology of social institutions” nor the “psychology of so- 
cial institutions” serves as a descriptive term, in view of what 
men in these fields have been doing in the past to describe the 
generalized observations which we wish to make in this 
chapter. They ought logically to describe such a study, but the 
connotations which have now clustered around these terms 
prevent them from actually describing it. 

Therefore, I choose the term “Political Dynamics” to refer 
to a science about society which treats its ideals, its literature, 
its principles of religion, law, economics, political systems, 
creeds, and mythologies as part of a single whole and not as 
separate subjects, each with its own~ independent universe 
of principles. The term is not original and is already becom- 
ing familiar. I select it because it represents the easiest transi- 
tion I can think of from the term “political economy” which 
described an individualistic era. We have reached a tirne 
when men are beginning to realize their complete interde:- 
peridence, when the personality of the individual is sub- 
merged in the personality of the organization. What I have 
in mind is a science of the diagnosis of maladjusted organi- 
zations in an age where organizations have replaced individ- 
uals as units. 

Tffe felfowing somewhat sketchy principles are set out 
only to show the kind of observations which can be made 
from the platform of such a science. Most of them are of 
course “half truths,” because any classification of the tum- 
bling stream of events which is not actually separable into 
classified elements represents only an emphasis on some par- 
ticular phase of the scene and ignores other phases. Never- 



350 T he Folklore of Capitalism 

theless, we must classify if we are to talk at all, and I there- 
fore submit the generalizations which follow. 

/. When men are engaged in any continuous cooperative 
activity, they develop organizations winch acquire habits, 
disciplines, and morale; these give the organizations untty 
and cause them to develop something which it is convenient 
to describe as personality or character. 

Illustrations: Yale University has a personality distinct 
from that of Harvard. Tammany Hall in New York has a 
personality which can easily be distinguished from that of 
the old Thompson machine in Chicago. The American Tele- 
phone and Telegraph Company has a very different person- 
ality from Paramount Pictures. 

2. The personality which organizations acquire is the re* 
suit both of accident and environment. The accidental fea* 
tures depend mostly on the types of individuals who first 
assume control. The environment puts great pressure on 
those individuals to conform to what is expected of them in 
terms both of practical results and the representation of sen* 
timental ideals. 

Illustration: It is apparent that the so-called “ten cent 
stores” have contributed tremendously to a lower cost of 
living in making commonplace articles such as hardware, 
glass, and all the various things they sell, in such quantities 
that useful and artistic objects have become widely distrib- 
uted. It is equally apparent that the chain grocery stores have 
not created a similar situation in food stuffs. There is not the 
same vertical control of the manufacturing process from the 
raw materials to the finished product. There is a tendency in 
the chain stores to suppress competition and then to raise 
prices after that competition has been suppressed. They have 



Some Principles of Political Dynamics 351 

done far less to create a wider and cheaper distribution ol 
food stuffs than the ten cent store has done in hardware. 

This difference is probably the result of accident in the 
rise to power of a different type of men in each of these dif- 
ferent mercantile organizations. It is, of course, difficult to 
say whether standardization in the chaotic hardware indus- 
try was harder or easier than in the chaotic food industry. 
The accident of the type of individuals in competition with 
the growing chain stores probably had much to do with the 
final result. The local grocery stores were more numerous 
and may have had a firmer place in community life than the 
local hardware stores. Nevertheless, one has a feeling that 
Henry Ford, starting in the grocery business, would have ac- 
complished the same kind of results as he did in the automo- 
bile business. 

5. Once the personality of an organization is fixed, it is as 
difficult to change as the habits of an individual. The same 
type of men succeed each other, moved by the same attitudes 
as their predecessors. 

Illustration: Paramount Publix grew to be a colossus in 
the amusement industry by virtue of the most wasteful and 
extravagant habits imaginable. It was a combination of the 
personalities of Lorenzo the Magnificent and Jean Jacques 
Casanova in the motley crowd of business enterprises, many 
of which affected the dour attitudes of our Puritan fathers. 
Came the reorganization. A distinguished businessman 
named Hertz was given power over the budget to effect 
economies. From a puritanical standpoint, this was an easy 
task. Waste was everywhere. Hertz cut down expenditures 
about twenty-five million dollars in one year. He was 
promptly forced to resign. Every economy that he instituted 
was entirely defensible. Yet the institution, instead of im- 
proving, appeared to be going to pieces under the strain. The 



352 T he FolJ^ore of Capitalism 

persons whom he discharged were, no doubt, parasites. Yet 
fear and anxiety spread to the most useful members of the 
organization. Mr. Swaine, the hard-boiled and able attorney 
for the bankers, had difficulty in explaining before the Se- 
curities and Exchange Commission why the activities of 
Hertz were stopped, because he was talking in the highly 
moral atmosphere of a public investigation, in which it is 
difficult to get a practical point across.^ Yet what he said 
seemed inescapably true. It was as if a father was trying to 
reform a drunken and profligate son by putting him in a 
strait jacket. Dogs cannot be trained that way, neither can 
persons, neither can organizations. Changes in institutional 
habits are made only by the gradual substitution of new 
haBlfsT Failure to realize this factor of institutional person- 
ality brings the efforts of most reformers to futility. 

In this principle of political dynamics is found the basic 
reason which impels a new revolutionary government to kill 
the leaders of the older institutions. They are filled with rage 
at the complete impossibility of changing old institutional 
attitudes by what they consider unanswerable arguments. 

4, Not only do organizations acquire personalities, but 
they also acquire three-dimensional substance. Thus habits 
and disciplines and hopes of a great organization are given a 
money value. Capitalized earning potver is called '‘property** 

1 Securities and Exchange Commission, Report on ,, , Protective and 
Reorganization Committees, Part II, p. 87. 

“Mr. Hertz has been more than modest in his description of his ac- 
complishments in Paramount. He did a magnificent job. . . . 

“However, as the year went on the burdens upon Mr. Hertz, worries, 
quite understandably, were such that Mr. Hertz became toward the end of 
the year increasingly nervous and I personally, by reason of my profes- 
sional relationship with the situation. Sir William and Mr. Kahn became 
very much worried about the personnel situation which was developing. 
Mr. Lasky dropped out. And the atmosphere at Paramount was charged at 
all times with high excitement. Everybody was afraid of his job.’* 



Some Principles of Political Dynamics 353 

and is then treated as if it could be moved from place to place 
and sold. Then people dealing with these imaginary person- 
alities deal with them as if they owned this sort of property. 
Without this alternate reification and personification of the 
same things a corporate structure could not exist and do busi- 
ness under a money economy. 

Illustration: A whole system of theoretical economics has 
been built up on the unconscious assumption that organiza- 
tions, which from one point of view are considered individ- 
uals, from another are storehouses of tangible property. To 
say that the Baltimore and Ohio Railroad Company owns 
the Baltimore and Ohio Railroad is like saying that the 
United States Marine Corps owns the United States Marines. 
Yet in an age where the ownership of “property” is an essen- 
tial quality of a great individual, the personification of the 
organization compels us to think of it in these terms. 

5. Organizations which are personified in the mind of the 
public have the efect of making their members uncon 
sciously submerge their own personalities and adopt the per 
sonality of the organization while they are acting as a pan 
of it. 

Illustration: A friend of mine, the head of a moderately 
large law firm, at great personal loss kept all of his law clerks 
during the depression. He was also a director of a public 
utility. As a director he voted to fire employees and cut wages 
and at the same time actually increased the salaries of cer- 
tain executive officials. While acting for the company he was 
unconsciously compelled to assume the mythology of the 
hard-boiled public-utility magnate. As a person he was a dif- 
ferent individual. Rosenwald, as head of Sears, Roebuck and 
Company, paid low wages and was uninterested in better 
working conditions for his employees. As an individual he 



354 ^ FolJ^lore of Capitalism 

was one of our greatest philanthropists. He had a compli- 
cated explanation for these two different roles and seemed to 
believe that he had thought the whole thing out logically. 
Instances of this kind among our knights errant of business 
are too commonplace to develop further. Liberals, observing 
this phenomenon through the spectacles of their theories, 
are unable to understand it. They therefore assume that busi- 
nessmen are hypocrites, not realizing that they are observing 
a fundamental principle of human organization. 

Another illustration: Employees of organizations which 
have high morale and discipline take as much satisfaction 
and pride in the size of the buildings, the luxury of the ex- 
ecutive offices, and the various other exploits of the organi- 
zation as though they were their own accomplishments. 

A third illustration is taken from an account by Douglas 
Churchill in the New Yor\ Times of June 13, 1937: 

A few weeks before Jean Harlow’s death she said, in discussing a 
tragedy in her life: “When I left the church after Paul’s funeral 
[Paul Bern, her former husband] people broke through the 
police lines and surged about me. There were words of sympathy 
and ghasdy words and demands for autographs. I was shocked. 
They seemed too heartless. Later, as I thought about it, a realiza- 
tion came. They meant no disrespect. They were kindly and 
gracious and thoughtful in their own lives, and had I been an 
individual they would have treated me as one of their own. But 
to them I was not a person, I was an institution. I had no more 
personality than a corporation.” 

This amazing phenomenon of a mechanical age, this succes- 
sion of light and sound vibrations, has created a new world as 
much apart from normal life as metaphysics. Nothing like it has 
ever been known. Today, through the motion picture, the public 
idolizes shadows that vanish with the turn of a switch. It is not 
strange, then, that so weird a result should stem from an equally 
unbelievable source. To make it even more fantastic, the result 
is responsible for the cause. 



Some Principles of Political Dynamics 355 

6 . Institutional personalities acquire the characters given 
them by the folf^lore of the times. Since every character is 
necessarily a whole bundle of contradictory roles, institutions 
have to appear in all these contradictory r6les. 

Illustrations: Thus a business corporation is supposed to 
make money for its stockholders by hard bargaining and ef- 
ficiency. It is also supposed to be a successful business leader 
with all the trappings of leadership. It is also supposed to 
represent the best in morals and ethics. Our industrial feudal- 
ism has produced a combination of magnificent buildings, 
hard trading, low wages, high executive salaries, philanthro- 
pies, and all the alternating extravagances and economies 
that go with these. 

For similar reasons a government organization which the 
public insists is “bureaucratic” tends to become “bureau- 
cratic.” 

7 . Institutions once formed have the persistency of all liv- 
ing things. They tend to grow and expand. Even when their 
utility both to the public and their own members has disap- 
peared, they still survive. The economic theory that marginal 
business concerns will be eliminated by competition has just 
about as much truth in it as a theory that marginal churches 
which do not actually increase the comfort and happiness of 
their members tend to eliminate themselves. Sometimes they 
do; sometimes they do not. The answer depends on factors 
which determine organizational strength, not comfort and 
peace to the members of the organization. That last is only 
one of a number of elements and perhaps one of the least im- 
portance. 

Illustrations: Struggling churches and colleges are often 
supported by people who haven’t the slightest belief in their 
utility because they feel that it is not consistent or logical to 



356 T he FolJ^ore of Capitalism 

change their attitudes. The psychology which makes possible 
the survival of such institutions is similar to the psychology 
which compels parents or relatives to keep an idiot child at 
great expense for medical care and nurse’s services, long after 
all possible affection for the child has disappeared. This ac- 
counts for the support of thousands of absurd organizations 
long after they are no more than a burden. Keeping them 
going seems the only decent thing to do. 

For example, as this is being written, the writer has just 
sent a small check to an institution which he regards as pe- 
culiarly useless. The process was as follows: The first de- 
mand was ignored. The second demand came in the form 
of a letter asking whether I was going to go back on my old 
friends and desert the cause, or whether I was still with them 
in spirit. I sent the check with the depressing realization that 
this struggling institution will be a burden on me and others 
as long as we live. It will always be in trouble, but it will 
probably, somehow or other, manage to survive. 

Habit, as well as sentiment, is a powerful factor. In the 
anarchy of the soft-coal industry in West Virginia the writer 
has seen a coal-mining company go bankrupt only to be 
taken over by its creditors, who go bankrupt, only to be taken 
over by their creditors, who go bankrupt, and so on. 

The economic law which is supposed to cause marginal 
businesses to be eliminated does not work at all when it deals 
with organizations whose members prevent each other from 
expressing the doubts which all of them feel. No one likes 
to change his former position before his fellows. There is 
nothing so inelastic as a great organization of any kind be- 
cause of men’s passion for appearing consistent in public. 

8. Institutional creeds, such as law, economics, or theology, 
must he false in order to function effectively. T his paradoxical 



Some Principles of Political Dynamics 357 

statement means that they must express contradictory ideals, 
and must authoritatively suppress any facts which interfere 
with those ideals. 

Love of consistency and devotion to realism will wreck 
any institutional creed. When consistency is emphasized, 
conflicting ideals which may be very important in retaining 
loyalties have to be abandoned. When realism is stressed, it 
immediately becomes apparent that the institution is not liv- 
ing up to its ideals. Therefore, attempts to make creeds con- 
sistent, or to make preachers practice what they preach, are 
effective as destructive, but not as constructive, forces. What 
radicals are constantly calling hypocrisy in legal, economic, 
or ecclesiastical bishops is in reality their ability to act well 
on the institutional stage which has been set for them by a 
complex of forces for which they are not responsible. 

Because of this principle expert technicians seldom make 
good senators, and business organizers, when thrown into 
the political arena, are always disappointing. The difficulties 
of the engineer in government were illustrated by the career 
of Mr. Hoover, who was always in a state of confusion be- 
cause he could not look at legal and economic principles ob- 
jectively. It was his sincerity that wrecked his administration. 
In the same way, a technical training in the psychology of 
sex is not particularly good preparation for a romantic lover. 

All this is just another way of stating the obvious truth that 
the roles of the actor on the stage and the technician who di- 
rects the play are entirely different. Ability in one of these 
lines has little relation to ability in the other. The creed of 
any institution is public presentation of a drama in which 
the institution is the hero. The play is spoiled unless the ma- 
chinery behind the scenes is carefully concealed. In this lies 
the explanation of the paradox that legal and economic prin- 
ciples must be false in order to be effective. 



358 T he Folklore of Capitalism 

9. The contradictory ideals of an institutional creed and 
the variance between these ideals and the actual conduct of 
the institution must be reconciled. If no emotional conflict is 
felt the reconciliation may be accomplished by a very simple 
ceremony. 

Illustration: The equality and democracy of the army are 
represented by the fact that the officers salute the privates. 
The complete superiority of the officers is represented by re- 
quiring the privates to salute first. There is no argument nor 
literature on the subject because a disciplined army has fewer 
spiritual conflicts than any other type of institution. 

Equality and democracy in industrial organization are rep- 
resented by employer-employee banquets, by our great “suc- 
cess” literature, by our businessmen’s clubs and so on. The 
Saturday Evening Post seldom goes to press without a story 
celebrating this idea. So generally accepted is this myth that 
persons in the United States who are not successful usually 
blame themselves. The Lynds in their second book on Mid- 
dletown attempt to state objectively the creed, generally ac- 
cepted even by unsuccessful Americans. This creed which is 
too long to insert here illustrates the commonly held belief 
that a business autocracy is real democracy. 

Observations which deny this myth of equal business op- 
portunity are branded as communistic. 

70 . The ceremonies which an institution adopts to recon- 
cile its conflicting ideals are addressed to its own members, 
not to outsiders. Therefore they are seldom convincing to the 
critics of the institution. 

Illustration: The persecution of Jews in Germany as a 
means of building morale is almost incomprehensible to an 
outsider. An outsider who judges this kind of ceremony by 
his own standards is therefore very easily misled into think- 
ing that an institution which does such queer or such im- 



Some Principles of Political Dynamics 359 

moral things cannot endure. Most of the predictions of the 
early downfall of the Russian, German, or Italian dictator- 
ships were made on the theory that since they were adopting 
the wrong ‘‘principles” they were bound to fail. 

The only realistic way to judge the effectiveness of any 
ceremony is to observe its effect on the institution itself, not 
on those outside of it. If the ceremony increases confidence 
and quiets doubters, the fact that it is illogical and absurd is 
immaterial. Of course the institution may develop cere- 
monies which bring it into conflict with other institutions, 
but this is an aspect which we are not considering here. 

Political arguments in a campaign are actually addressed 
only to the side for which they are made. They never con- 
vince the other side. Indeed arguments so framed that they 
would convince radicals of the desirability of any given ac- 
tivity would turn conservatives against it. Of course the mem- 
bers of the institution, when they have found a satisfactory 
ceremony, always believe that it represents the “truth,” and 
are anxious to parade it before their enemies. The usual re- 
sult is that the enemies are outraged at the lack of clear think- 
ing on the part of their opponents. Thus political debate is 
in reality a series of cheers in which each side strives to build 
up its own morale. The extreme and violent statements are 
the stuff of which battle cries are made, and hence in a heated 
campaign those are the only effective material for debate. 
This accounts for the fact that supposedly sensible business- 
men like Colonel Knox go to such fantastic extremes during 
a campaign. What they are actually doing by such a process 
is cheering themselves up, and creating enthusiasm in their 
own organization. In no struggle between organizations, 
under any form of government, has logic triumphed because 
it was on the one side or the other. Logical persons usually 
succeed in alienating all their followers sooner or later be- 



360 The Folklore of Capitalism 

cause they are always pointing out contradictions in ideals 
which are emotionally necessary. 

II, Where the conflict between the ideals and the practical 
needs of an institution becomes so acute that it cannot be rec- 
onciled by a ceremony, we find the institution splitting itself 
into two separate parts. The one represents the ideal, and the 
other the practical activity which contradicts that ideal, 

a. The simplest form of resolution of such a conflict is to 
segregate the ideal into some sort of church where it 
need only be brought out on ceremonial occasions and 
therefore will not conflict with practical activities. 

This was illustrated time after time in the testimony of 
large employers before the Senate committee on the wages 
and hours bill. These employers were vaguely conscious of 
the cruelty of low wages. The more learned resolve that con- 
flict by subscribing to learned institutions which are sup- 
posed to figure it out for them and thus enable them to for- 
get it. The more naive simply join the Church and let their 
religion take care of the matter for them. As an example of 
the latter process we quote from the Washington Post of 
June 12, 1937. 

John E. Edgerton, former president of the National Association 
of Manufacturers and now president of the Southern States In- 
dustrial Council, was the witness at hearings on the Black- 
Connery wages-hours bill. 

Baldish and grim-faced, his sandy eyebrows knitted in a 
scowl, Edgerton had told the committee that he had “allowed” 
a number of grandmothers to work for $6 a week during the 
depression “as a humane thing.” 

Apparently shocked by his testimony, both Republicans and 
Democrats joined in close examination of the aggressive witness. 

Representative Clyde Smith (Republican), of Maine, and 



Some Principles of Political Dynamics 361 

Representative Reuben T. Wood (Democrat), of Missouri, asked 
him how a family could live on less than $i6 a week. Edgerton, 
obviously irritated at the questioning and at the repeated laugh- 
ter of spectators at his answers, snapped: 

“Eve never studied those social problems except in my church 
connections!*'^ 

Smith asked: “Should all other employes in other plants suffer 
just because you pay less wages and work your plant 24 hours a 
day?" 

“No,” mumbled Edgerton. 

Wood took up the questioning. It went like this: 

Q. Sixteen dollars a week, with about 42 working weeks, 
amounts to $620 a year. Do you think $620 a year is sufficient to 
allow a family to live decently, with schooling for the children? 

A. It all depends. Some people can*t thin\ of a living standard 
unless they have four glasses of beer a day, or some wtne,^ [Note 
the unconscious resort to a moral code to justify cruelty. No one, 
including the writer, can escape this on occasion.] 

Q. Of course, some of your men might drink champagne on 
that fabulous wage you pay them. Answer the question, do you 
think $620 a year is enough? 

A. Enough for what? Oh, I won’t answer that question. The 
amount of money I pay out — whether that’s enough for ordinary 
comforts — ^that’s not relevant to this bill. It’s a different question. 

Representative Richard J. Welch (Republican), California, 
then asked about Edgerton’s statement that “There are 1,000 
things a man could do on $16 a week.” Welch said: “What are 
some of these 1,000 things a man can do on $16 a week?” 

Edgerton burst out: “Why, I’ve never thought of paying men 
on a basis of what they need. I don’t inquire into what they want. 
I pay men for efficiency. 

“Personally I attend to all those other things, social welfare 
stuff, in my church work.” (Here the crowd in the hearing room 
roared with laughter.) 

Edgerton, glaring at the spectators, sneered: 

“Of course, some people don’t know about that sort of thing, 

2 The italics arc mine. ^ The italics arc mine. 



362 T he Folhjore of Capitalism 

church work and so. . . . But thalfs the feeling side of life, 
church contributions and church wor\. That's not business!'^ 

As an exaxnple of referring a conflict between ideals and 
the practical situation in labor relationships to learning rather 
than to simple faith, we quote a column of Dorothy Thomp- 
son, writing on the wages and hours bill. 

BLINDNESS IN CRISIS 
U.S. Unknowingly Faces Change in Government 
Through Four Bills. 


The wages and hours bill is presented as a measure of social jus- 
tice. It creates a labor standards board, to be appointed by the 
President, of five men at salaries of $10,000 a year each, and these 
five men arc to hold the power of life and death over American 
industry, both interstate and intrastate. 

Congress will do no more than fix a general objective. It will 
be up to these five men to decide hours, rates of minimum pay 
and labor standards of all kinds, for all parts of the country, set- 
ting one standard here and another there, their edicts having the 
force of law, and disobedience entailing fine and imprisonment. 

The conclusion of the column reads as follows: 

Crisis before U.S. 

'*We face an even greater crisis than in 1932,” said the President 
in a speech exhorting support for the plan for reorganizing the 
judiciary. 

We do indeed. And the question before us, as Americans, is 
whether we are going to face it, or go grinning dumbly toward 
an uncertain fate, trusting the laws of chance and the President. 

For it is possible to take steps which never again can be re- 
traced. The processes of history are not always reversible. We 
can start a program which then will go on, under its own im- 
petus, invested with police powers which the people cannot con- 

^ The italics arc mine. 



Some Principles of Political Dynamics 363 

trol. I cannot recall a case in history where a popular body, hav- 
ing yielded its powers, ever was able to recapture them. (New 
Yor\ Tribune, June ii, 1937.) 

Here Dorothy Thompson comes to exactly the same con- 
clusion as Mr. Edgerton. However, her church is a sort of 
composite of the lessons of history and the principles of eco- 
nomics and the guaranties of the Constitution. She gives a 
general impression that she has made a deep study of these 
mysteries and that these voices inform her that nothing 
should be done by actual concrete individuals to control the 
situation. The heading “Blindness in Crisis” means that the 
administration is blind to the complicated reasons which 
prove that control of labor anarchy by the Government leads 
to disaster. 

b. Where a separate institudon has arisen in order to repre- 
sent an ideal by separating it from the practical situa- 
tion, it is never able to reach any conclusion leading to 
practical action. Its failure to reach such a conclusion is 
part of its function because the debate convinces every- 
one that nothing should be done about the practical 
situation without further study and prayer. 

Illustration: The National Policy Committee was formed 
so that learned men could throw light on the problems of the 
day. Its special committee on labor was composed of a dis- 
tinguished group of professors, lawyers, and businessmen. 
Their conclusion on a practical method of making labor 
unions responsible was as follows; 

Interest of Committee members in the question of the incorpora- 
tion of labor unions seemed to wane after it was pointed out that, 
if we did not have Federal incorporation, incorporation in indi- 
vidual states might result in certain states making available to 
labor unions all sorts of wide powers that they do not now 



364 T he Folklore of Capitalism 

possess, and, if we did have Federal incorporation, that would 
probably lead to the Federal incorporation of business cor- 
porations.® 

The rest of the report of the committee’s discussion shows 
that it fulfilled its function of representing conflicting ideals, 
and leaving practical action up in the air.® 

The most important institutions to represent ideals in gov- 
ernment uncontaminated with the complicating political and 
psychological factors which actually mold institutional con- 
duct are our universities. Any meeting of a political science 
or legal association of professors furnishes a perfect illustra- 
tion of the inability of institutions which perform that pur- 
pose ever to commit themselves on definite action. 

12. Conflicts which create such elaborate systems of learn- 
ing are symptoms that old institutions are no longer meeting 
practical needs in an acceptable way. The learning serves both 
of the opposing sides. For the conservative it justifies old in- 
stitutions. For the radical it proves the necessity for the new 
institutions which are struggling to gain recognition. The 
debate becomes a substitute for practical action. 

Illustration: Thus, theological learning increased when the 
medieval church became confused in its practical objective, 
just as economic learning increased when the great industrial 
organization ceased to expand and became faced with new 

s The National Policy Committee, Washington, D. C., Special Commit- 
Ue Memoranda, No. II (i937)- 

« “The Committee believes that an immediate and vital need is the estab- 
lishment by the Federal Government, of Commissions of Inquiry, to study 
disinterestedly and carefully the working of specific economic experiments 
such as the Railroad Labor Act and the Guffey Coal Act, for the purpose 
of periodically reporting to Congress and the public on the workings of 
these exjperiments, and of attempting to appraise from time to tune their 
results as these affect not only labor but managerial efficiency, capital in- 
vestment, and the general welfare/* 



Some Principles of Political Dynamics 365 

problems. Again, when we felt no conflict about our punish- 
merit of the criminal, there was no literature of criminology. 
Our present vast literature on crime is a product of a new 
attitude toward the criminal, coupled with a refusal to give 
up the old attitude. 

/j. When one of the two contradictory ideals which give 
rise to elaborate systems of learning concerning institutional 
creeds disappears, the learning disappears with it. 

Illustration: At the beginning of the century, when the 
Protestant church clung to an old theology and also insisted 
on doing practical social work, the struggle between modern- 
ism and fundamentalism produced huge tomes and treatises. 
When the church decided its main function was social utility, 
its entire theological learning became unimportant and the 
modernist-fundamentalist controversy disappeared. Again, 
when men desired liquor and also the ideal of prohibition, 
books poured from the presses. Today the philosophical lit- 
erature on the liquor question is practically nonexistent. 

With respect to relief, wages, and budget balancing, we 
are struggling today with two contradictory ideals: (i) that 
rugged individualism will be impaired by feeding the poor; 
and (2) that humanitarianism compels us to feed them. The 
spiritual struggle revolves about the words “budget balanc- 
ing,” “bureaucracy,” “paternalism,” and the like. When we 
recognize the obligation to distribute food to those who need 
it, there will be no more literature on this subject than there 
is on the subject of whether a man should take care of his 
mother-in-law. There may be jokes and complaints, but no 
learned philosophy. However, the institutions which finally 
solve that problem will be faced with new conflicts, which 
will be reconciled in exactly the same way. 

j^. A conflict often arises between an ideal and a social need 



366 T he Foll^ore of Capitalism 

not accepted as legitimate or moral. This creates a situation 
in which an immoral and undercover organization will arise. 
The ideal will be represented by a moral organization which 
proves that the social need is not a real need at all, but a form 
of sin. The need will be represented by an immoral organiza- 
tion, which will be accepted and tolerated as a necessary evil, 
in the same way that the Church accepted the existence of the 
Devil. 

Illustration: During prohibition we saw a great enforce- 
ment organization and a great bootlegging organization, 
each functioning at full speed. Today our ideals of govern- 
ment create a situation in which the political machine is a 
necessity and at the same time an evil in the minds of all 
righteous and right-thinking people. For example, we quote 
from Westbrook Pegler: 

A political machine has no more right to dish out the customers 
money to Joe Dokes and George Spelvin Just because they turned 
out the vote, than a grassroot royalist has to incorporate his sub- 
urban south 40 as a commercial parsley ranch and claim losses 
on that account. The trouble is that the custom of planting bums 
in appointive jobs in reward for political service has prevailed so 
long that your hard-shelled politician thinks you are being naive 
when you exclaim, “My God, can such things be!” {Washington 
Post,]\inc II, 1937.) 

Of course, Mr. Pegler is naive, as all preachers must be. 
The political machine exists because people like Mr. Pegler 
do not wish government to be practical. They insist on its 
conforming to contradictory standards, of which contradic- 
tions they are completely unaware. Scrupulous people there- 
fore find it difficult to work in political organizations while 
preachers like Mr. Pegler are screaming at them. As a result 
only unscrupulous people can do the practical work required 



Some Principles of Political Dynamics 367 

o£ political organizations. This isn’t Mr. Pegler’s fault, or the 
politician’s fault. It simply represents the inevitable vv^orking 
of the lav/ of political dynamics. 

Of course, it is true that political machines contain a greater 
proportion of nonrespectable people than private industry. 
But it is not true that they contain a greater proportion of in- 
effective and useless people than more respectable organiza- 
tions. Indeed, the “graft” in respectable organizations is actu- 
ally much larger, because it is cloaked with the mantle of 
piety. But even if Mr. Pegler should ever read the investiga- 
tions of the Securities and Exchange Commission into cor- 
poration reorganizations, he would still regard “politics” as 
the more dangerous phenomenon, because politicians are not 
dealing with “their own money” as corporate executives are. 
The born preacher must attack “sin.” Sin is always deter- 
mined not by the facts but by the mythology of the time. It is 
the writer’s guess that there are as many bums among re- 
porters as among politicians. However, Mr. Pegler does not 
feel the same spiritual conflict about American newspapers 
that he does about government. 

75. Where a conflict between an ideal and a practical need 
not recognized as legitimate has created a respectable institu- 
tion to represent the ideal and a nonrespectable one to do the 
job, the need will be filled by the two organizations conduct- 
ing a public battle with each other. The respectable organiza- 
tion will satisfy the ideal by trying to abolish the nonrespect- 
able one. The nonrespectable institution will survive because 
the struggle will compel it to maintain an efficient disciplined 
organization, A curious paradox will result. The reform or- 
ganization will owe its existence to the vice which it attac\s, 
while the vice which it attacks will be tolerated because of the 
belief that it is the fault of no one, since all respectable people 
are in favor of reform. 



368 The Folklore of Capitalism 

a. It is difficult to define the term “organization” with refer- 
ence to this principle. Sometimes it is more accurate to 
say that the same organization engages in respectable 
and sub rosa activities at the same time, as in the case of 
great corporations which maintain labor relations com- 
mittees and spy systems at the same time. In other cases 
there may exist two entirely separate organizations 
closely linked together, as in prostitution where the 
police are driving prostitutes out of town publicly and 
tolerating them privately. 

Illustrations of this principle are: The great bootlegging 
organizations during prohibition, organized prostitution, 
the political machine, organized gambling, undercover or- 
ganizations in international politics, the divorce mill at Reno, 
Nevada, organizations to hire athletes at respectable colleges, 
wars against crime, and so on. We will outline this process in 
more detail with respect to the political machine. 

The social needs which are filled by the political machine 
are so many and varied that they are almost impossible to 
catalogue. Whatever the government has to do but cannot do 
in public must be accomplished by this undercover organiza- 
tion. On its lowest plane it operates the relationships be- 
tween government and organized vice. Here the political 
machine itself splits up into two organizations, because 
prostitution is subject to such heavy taboos that even corrupt 
political machines handle the problem with much more diffi- 
culty than such functions as giving patronage to deserving 
politicians. The most despicable and cruel elements of society 
assume the task of filling this need. Whenever this age-old 
profession is regulated in a more orderly and less cruel man- 
ner, the taboos of the time demand a crusade, which forces 
it back into the hands of the more reckless criminals. These 
investigations are as much a part of the institution of prosti- 



Some Principles of Political Dynamics 369 

tution as the two opponents in a tennis game are part of the 
game. Because of our climate of opinion this sort of game 
between reformers and criminals is a necessary part of the 
sex life of a great city. So also is the great literature on the 
subject, composed for the purpose of making right-thinking 
people more comfortable about the situation. Women’s clubs 
conduct their wars on crime and achieve a sense of unity and 
virtue thereby. The whole community is fascinated and re- 
pelled at the same time and finds an outlet in speeches and 
crusades. These crusades are not remedies for the evil, but a 
part of the total complex which creates it. 

Municipal governments may rise and fall through this con- 
flict between organized vice and social ideals. The battle 
never has ended, and, in the nature of things, never will end 
so long as our present myths are worshiped. The writer is not 
here taking sides as to whether the preservation of the myths 
about sexual conduct is worth more than prophylaxis. What 
would happen in New York if illicit sex relations were made 
safe, and would this be a “good” thing? Such questions arc 
for the preacher. We are using prostitution only as an illus- 
tration of what inevitably happens when a social ideal and a 
social need conflict. 

Other tasks of the political machine are more easily toler- 
ated. In a country which demands paupers* oaths and the ut- 
most humiliation before relief is granted to the unemployed, 
the greatest political machines have owed their real strength 
to the fact that they took care of underprivileged people 
without humiliating them. 

The writer recalls a conversation with a member of a cor- 
rupt political machine in a large city. The local papers had 
been filled with horror over the recent election of a prose- 
cuting attorney alleged to be in alliance with gangsters. Edi- 
torial writers were in despair over the ignorance of the voters 
and wanted to know what a human race was coming to 



370 The Fol kjore of Capitalism 

which followed demagogues and refused to learn by experi- 
ence. The political worker said: “I am naturally a humani- 
tarian. Under the present political set-up I have thirty fami- 
lies to take care of. I do all that is humanly possible for them, 
not on the cruel basis of relief agencies, but in a way that 
permits them to hold up their heads and remain human be- 
ings. What I do is against the moral reactions of people who 
know how help should be administered to the helpless, but it 
works. I have five hundred votes as the result of my work, 
which I absolutely control. These people do not want to vote 
for gangsters. But they know that if I am out of power they 
will be turned over to a cruel system of charity. Can you 
blame them if they feel that they would be disloyal to their 
own group to vote for an administration which would make 
their lives miserable by preaching to them that they should 
willingly suffer indignity for the sake of decreasing the bur- 
den on large taxpayers?” 

Here again the writer is not taking sides. He is only ex- 
plaining why reform administrations backed by the best 
people seem to have short-lived existences in great cities. 
They do not, and because of the nature of their moral pre- 
conceptions cannot, build up political machines of the char- 
acter required to fill the need. 

Of course, many readers will doubt the humanitarian work 
of the successful political machines of our great cities. Cur- 
rent folklore compels us to believe that corrupt politicians are 
rapacious and cruel. The writer believes that the exact con- 
trary is true, that theirs is a technique which requires gen- 
erosity and kindliness. Few political leaders become im- 
mensely wealthy. Many of them are poor. They are unable 
to operate on principles of petty thrift and hard dealings with 
individuals characteristic of the successful trader. There is, 
however, no statistical way of proving this observation and 
it will generally be denied because it is a necessary part of the 



Some Principles of Political Dynamics 371 

intellectual atmosphere which surrounds the political ma- 
chine that the machine appears to be wicked and unworthy. 
Any time that the tasks which present political machines per- 
form become recognized as proper objectives of government, 
they will no longer be delegated to sub rosa machines. The 
sub rosa organization arises not because of bad people but 
because certain social needs must be made to appear to be 
bad, and there is no other way of giving those needs that 
appearance and filling them at the same time. 

To illustrate the charitable function of the political ma- 
chine, we quote from a penetrating sketch of a noted Tam- 
many district leader which appeared in the New Yor\er of 
July 25, 1936, by Jack Alexander. 

Nowhere else has the great parasitical business of American ward 
politics reached the level of development to which Tammany 
Hall has raised it. Largely responsible for the abiding success of 
Tammany is its general staff of thirty-five district leaders, a 
varied band consisting of lawyers, ex-bartenders, ex-judges, col- 
lege graduates, ex-teamsters, ex-longshoremen, and similar fry. 
Their basic function, each in his own district, is to amass and 
preserve a strong voting majority. Clothed with a quasi-official 
status accorded by loose political organization and public apathy, 
they use their control of public funds and political expedients for 
exacting private contributions, to garner the votes of the poor, 
and to swell their own power and that of Tammany Hall. 
Against the harsh criticism of civic reformers, the district leader 
fortifies his feelings with the consoling thought that while he 
takes from the rich, or at least those able to pay taxes, he gives 
to the impoverished. Broadly viewed, he is indeed a redistributor 
of wealth, but with an unfailing knack for bettering his own for- 
tunes in the process. . . . 

In the districts, vote control is built up largely by what the leaders 
call their charities. This means that in exchange for a beneficence, 
the voter becomes a sworn follower of the district baron. Leaders 



372 The Folklore of Capitalism 

have learned that human favor is fickle unless mortgaged in some 
way. A man may vote your ticket one year because he likes you 
and turn against you the next year because of political convic- 
tions. But if you put him under personal obligation, he is your 
voter for life, and so are his adult kin. Poverty and misfortune, so 
widespread in congested Manhattan, give the leader his main 
chance, and the darker the squalor the more resplendently he 
shines. Because the poor are grateful, the leader makes his dis- 
trict clubhouse a disbursing place for coal in winter, fresh milk 
for ailing babies in summer, turkeys at Christmas and Thanks- 
giving, and lunch money and clothing at all times. Governmental 
charity has proved to be no competition, for Tammany relief is 
free of red tape and questionnaires, and it goes on forever. 

/6. Where there is a conflict between an ideal and a social 
need recognized as legitimate, it tends to create two organi- 
zations, both of which are respectable. However, the one rep- 
resenting the ideal will have the higher place in the hierarchy 
than the one ministering to the practical need. 

The operation of this principle may be observed in prac- 
tically every organization Avhich pretends to lofty ideals. 
Perhaps the best illustration is the separation of administra- 
tive tribunals from courts. Courts represent a rule of law 
above men. This compels the denial of personal power built 
on the exercise of human judgment or benevolence. To in- 
troduce this personal element into a logical set of abstract 
principles is to confuse the symmetry of the judicial system. 
Therefore, administrative tribunals appear to apply practical 
considerations to court decisions. So long as the ideal of the 
rule of law is paramount, the administrative tribunals will 
have a lower place. They will be kept in that place by a litera- 
ture which keeps emphasizing the dangers of personal power. 

The effect of this literature is usually to introduce great 
confusion in administration because courts representing the 
ideals are out of touch with practical problems. A typical in- 



Some Principles of Political Dynamics 373 

stance is found in judicial interference with tax administra- 
tion. Here the courts are representing the ideal that taxation 
by government is a necessary evil, requiring constant judicial 
supervision. We cite as an example the judicial treatment of 
a simple problem which would have been easily solved had 
there existed no spiritual conflict about the collection of 
taxes. 

!Prior to 1925 the Bureau of Internal Revenue was con- 
fronted with the following very simple situation: A widow 
was given the income of the trust during her life in lieu of her 
statutory rights in the estate of her husband. The question 
was whether the income from that trust should be taxed to 
the widow or to the trustee. The method that had been used 
was a common one of protecting beneficiaries and a large 
number of taxpayers were affected. 

The Bureau first ruled that the widow should pay the 
tax. Litigation immediately followed. In 1925 in the case of 
Drexel v. United States^ the Court invalidated the Commis- 
sioner’s ruling. The Commissioner asked for an immediate 
final determination by the Supreme Court of the United 
States. That Court, however, denied certiorari. Shortly there- 
after three separate Circuit Courts of Appeals followed the 
opinion in the Drexel case.® 

Since the Commissioner had been denied access to the Su- 
preme Court of the United States, which alone could settle 
the matter finally, he had no choice but to change his ruling 
in conformity with these decisions. He therefore ruled that 
the taxes in such cases should be paid by the trustees instead 
of the widow. Immediately the trustees took up the fight. 
Finally, in 1933, eight years after the Drexel case and ten 
years after the original ruling, the Supreme Court in the 

7 61 Ct. Cl 216. 

® Warner v. Walsh, 15 F. (2d) 367 (1926); United States v. Bolster, 26 
F. (2d) 760 (1928); Allen v. Brandeis, 29 F. (2d) 363 (1928). 



374 Volhjore of Capitalism 

Butterworth case® held that taxes upon the income from such 
trusts should be paid by the beneficiary, sustaining the first 
ruling by the Commissioner. 

As a result of that decision the Commissioner had to re- 
verse himself again and for a second time attempt collection 
from the beneficiary. A new judicial obstacle was immedi- 
ately thrown in his way. In the decision of Davts v. Mays^^ in 
1934 the Court refused to order the trust companies to dis- 
cover the names of the beneficiaries so that the Government 
could reach them. 

This handicap was not the only one, because in the mean- 
time the statute of limitations had been running— first, on 
the returns of the trustees for the period in which the income 
was thought taxable to the beneficiary, then on the returns 
of the widow when it was found that the income was taxable 
to the trust. The statute of limitations had not, however, run 
upon the refunds which could be claimed by the trustees who 
had been taxed under the second ruling of the Commissioner. 
Therefore the Government was forced to defend suits for 
refunds. The matter was again on its slow and tedious way to 
the Supreme Court. Finally, in the recent case of Stone v. 
White}^ it has been decided that the United States in such 
cases is entitled to set off what is due from widows before 
making a refund to the trustee. 

Thus the supremacy of “law” over “bureaucracy” was vin- 
dicated, but in the process tax collection was thrown into con- 
fusion for ten years. The Commissioner was compelled to 
reverse his ruling twice; hundreds and perhaps thousands 
escaped the payment of tax because of the discretionary denial 
of certiorari by the Supreme Court of the United States, 
which was completely out of touch with the administrative 
problems facing the Commissioner. 

® 290 vs . 365. 7 fed . Sup , 596. 

301 US . 532 (1937). 



Some Principles of Political Dynamics 375 

Judicial history is full of similar developments. In the last 
century, indictments and pleadings in criminal cases were 
tangled in a maze of technicalities comparable to tax admin- 
istration today. One of the invariable symptoms of this con- 
dition in the administration of law is the rapid accumulation 
of precedents. Today this particular symptom is strikingly in 
evidence in tax law. The judicial tax opinions are collected 
in seventeen volumes of American Federal Tax Reports 
which average about 1,200 pages each, making a total judicial 
literature of about 19,000 pages. Added to that, the Board of 
Tax Appeals has published between 8,000 and 9,000 opinions 
respecting income, estate, and gift taxes. On top of that about 
a thousand new opinions are being printed each year. Tax 
administration is being overwhelmed by too much law. Ad- 
ministrative rulings are swamped by these precedents. They 
can no longer be relied upon because no one is learned 
enough to foretell all the judicial hazards which such a mass 
of conflicting opinions creates. 

ly. The confusion accompanying most liberal reform 
movements is due to the fact that they are generally attempts 
to ma\ethe institution practice what it preaches in a situation 
where, if the ideal were followed, the function of the institu- 
tion could not be performed. 

Illustration: This principle is responsible for the sad fate of 
reform movements in politics. It is further illustrated by the 
long struggle for the procedural reform of the law. 

Our modern method of trial by combat is not, and cannot be, 
an investigation, and yet it must pretend to be one. Therefore, 
a long succession of procedural reforms is aimed against the 
so-called ‘‘sporting” theory of justice, in spite of the fact that 
the entire dramatic effect of the judicial institution depends 
on the fact that it decides contests. When the procedure is 
“reformed” so that the trial is more of an investigation, the 



376 T he Foll^ore of Capitalism 

institution no longer looks like a “court,” but like an admin- 
istrative tribunal. To save its peculiar character the institu- 
tion unconsciously resists such reforms, 'while admitting their 
theory. This conflict creates the vast metaphysical learning 
which surrounds legal procedure. The reformer seldom real- 
izes, however, that this is not the fault of the courts. It is the 
inevitable result of the existence of conflicting ideals which 
the courts are compelled to dramatize. Procedural reform 
can only be effective where the reformer realizes that the 
judicial process is necessarily a dramatic contest. 

j8. Where the ideal and the practical needs are not in con- 
flict, an institution arises which attains the maximum prac- 
tical efficiency of which the organizing ability of the people 
is capable. 

In such an atmosphere the government can run the army, 
with no complaints about bureaucracy and with the general 
support of everyone. In such an atmosphere grew the great 
industrial corporation in the United States, which on the 
whole has been an extraordinary, efficient machine for the 
production of goods. Where it has failed is in its inability to 
change its objective, not in its inability to achieve it. There- 
fore, the great business corporation can play its politics 
openly, with a minimum of hypocrisy. It can admit its fail- 
ures and move on to other things. Better than any other set 
of ideals up to the depression, the corporate personification 
fitted into the folklore of the times as a method for the pro- 
duction of goods. 

79. Neither the ceremony nor the literature which sur- 
rounds social institutions can be consistent, logical, or rational 
because of the inherent nature of the psychological forces 
which bind men together in groups. 



Some Principles of Political Dynamics 377 

This fact causes little confusion or conflict in the case of 
a few ancient institutions whose acceptance is traditional and 
whose prestige is based largely on what may be called senti- 
mental reasons. For example, in church ritual today people 
generally do not feel it important to believe that the sacra- 
ment is the actual blood of the Savior. Again, people in 
England are not bothered because the ceremonial pretensions 
of the king are neither logical nor in conformity with fact. 
Old institutions, supported by long-standing tradition whose 
function is admittedly sentimental, need not go through the 
struggle of pretending to practice what they preach. Most 
going social concerns are faced with the necessity of appear- 
ing to be actually consistent with their ceremony and litera- 
ture and here arises constant spiritual and mental confusion. 

Today business ceremonies among great corporations are 
taken with such seriousness that they often get in the way of 
the actual efficiency of the organization. The great corporate 
offices housed in medieval splendor in New York City are 
an example of this. One is confronted with the spectacle of 
thousands of employees hauled to New York offices in 
crowded subways, living in the most expensive and uncom- 
fortable manner, although none of them are required to be in 
New York for any other reason than to surround the great 
corporate executive with something that looks like a court 
and to give a princely atmosphere to his office. So far as fur- 
thering the avowed purpose of the corporation is concerned, 
the services of these workers could be employed more cheaply 
and efficiently in smaller towns near the actual producing 
unit of the corporation. The prominent persons in such or- 
ganizations who have a real reason for being near the finan- 
cial center arc few. The doctrine of the business corporation 
is efficiency. Its actual need today is public acceptance and 
ceremony. Hence, it cannot be consistent. Neither can it ad- 



378 T he Foll^lore of Capitalism 

mit its Inconsistency. Therefore, its ceremonies and literature 
are necessarily much more cumbersome and wasteful than 
those which support an institution like the kingship of Eng- 
land, because no one is permitted to admit they are only cere- 
monies. If the prestige of financial corporate executives could 
only be kept alive by an annual parade or a weekly service, 
fewer people would have to live uncomfortably because of 
the need for such ceremonies. That, however, is impossible in 
our present climate of opinion. 

To sum up, institutional doctrine is never a frank descrip- 
tion of the practice and the purpose of the institution. There- 
fore, we who try to make institutions live up to their preten- 
sions are the worst of executives. The history of human or- 
ganization is strewn with the wreckage caused by people who 
tried honestly and sincerely to follow the logical implica- 
tions of accepted doctrine, 

20. A social need which runs counter to an abstract ideal 
will always be incompetently met until it gets a philosophy of 
its own. The process of building up new abstractions to 
justify filling new needs is always troublesome in any society, 
and may be violent. 

This principle does not apply in situations toward which 
men can take a fairly objective attitude. No change of the- 
ology is necessary to introduce new methods into the manu- 
facture of goods, because no taboos are involved. The atti- 
tudes which once prevented mechanical improvement are 
relics of the distant past. The operation of taboos against 
mechanical improvements among uncomplicated and primi- 
tive people seems to us one of the strange chapters of history. 
Yet it occurs in the highly sophisticated Chinese culture of 
today, which cannot, by any stretch of the imagination, be 
called primitive. It was a civilized and not a primitive cul- 



Some Principles of Political Dynamics 379 

ture which once forbade the use of Arabic numerals. In the 
Roman Empire it took learned men with years of training to 
make the simple numerical computations which a boy of 
fourteen can make today. They used an accounting machine 
called an abacus. There was, of course, a vested interest in 
the continued use of the Roman system of numerals by a 
small class who operated abacuses. Yet it was not this class 
but the public opinion of people who had no interest what- 
ever in preserving abacuses which made it possible to forbid 
the use of Arabic numbers. In the same way, people with no 
conceivable interest at stake arc fighting the distribution of 
cheap electrical power by governmental corporations. The 
same vague fear of some sort of spiritual ruin which pre- 
served the Roman numerals perpetuates today the taboos 
against sensible governmental control over soil erosion. 

In social organization today our taboos and our need of 
propitiatory magic to support any change arc as compelling 
as they used to be in the acceptance of new medical or me- 
chanical devices by ancient peoples when such devices went 
contrary to some ancient accepted principle. In the area of 
social control we are now going through a world-shaking 
struggle, which threatens to be long, complicated, and pa- 
thetically ludicrous, to build up a set of abstractions or a 
social philosophy which will permit us to satisfy the practi- 
cal needs of our society. 

21. Public debate is necessarily only a method of giving 
unity and morale to organizations. It is ceremonial and de- 
signed to create enthusiasm, to increase faith and g^uiet doubt. 
It can have nothing to do with the actual practical analysis of 
facts. 

Illustration: An individual cannot live effectively without 
a code of ethics and a set of ideals. He must put these into 



380 The FolJ^lore of Capitalism 

words and at least a part of his conduct must be devoted to 
a ritual designed to celebrate these ethics and ideals. The 
same thing is true of an organization. 

Therefore the function of all political arguments, either 
used in campaigns, on the floor of legislative assemblies, or 
before courts is to reconcile the spiritual conflicts within an 
organization and to attract followers to that organization by 
ap^ating to their prejudices. In other words, every person 
seeking power over groups of people, without the use of 
physical force, must create enthusiasms which will make 
them follow him. There is no difference between the dema- 
gogue and the statesman, except on the basis of a judgment 
as to the desirability of the social ends and social values which 
move the one or the other. The man with the social yal^ 
which you do not like, you will call the demagogue. You 
will say that he appeals to emotion and not to reason. This, 
however, is only because “reason” is the respectable end of 
the two polar terms, “reason” versus “emotion,” and you in- 
stinctively want it to point toward your own organization. 

a. The notion that legislation becomes more expert because 
of prolonged public discussions of proposed measures 
is an illusion which follows the notion that public de- 
bate is addressed to a thinking man through whose de- 
cisions organizations have group free will. All pro- 
longed public discussions of any measure can do is to 
reconcile conflicts and get people used to the general 
ideal which the measure represents. 

Illustration : The prolonged discussion of the social-security 
bill produced an act which represented all the conflicting 
little pictures appearing in the atmosphere of the time. The 
bill was like a pension; it was like insurance; it recognized 
the doctrine of states rights; it recognized the notion that a 
government should not interfere in business, or be the 



Some Principles of Political Dynamics 381 

owner of “assets,” together with the notion that in social- 
security legislation the Government should be like an insur- 
ance company, with assets to back its obligations to the in- 
sured. From the point of view of social values the really great 
contribution of the first social-security bill was that it made 
the public recognize that the state owed a positive obligation 
toward the needy and that charity was not the solution of the 
problem. The social-security act will become more practical 
after the continued acceptance of this ideal removes it from 
the necessity of public debate. 

b. Public argument never convinces the other side, any more 

than in a war the enemy can ever be convinced. Its 
effectiveness consists in binding together the side on 
which the arguments are used. 

Illustration: Liberals go about in a constant state of amaze- 
ment that great corporate executives do not agree with the 
theories which they advance in such convincing terms. Con- 
servatives are constantly shocked at the logical atrocities 
committed by the liberals. The cruelties and outrages on the 
logical process committed by the other side become part of 
the combat propaganda in peaceful as well as bloody com- 
bat. There are about as many atrocities committed on the 
one side as on the other, but the partisans can see only those of 
their enemies. This should be accepted as a political fact by 
the observer. There is no possible way of avoiding it. Intel- 
lectuals are caught in this inevitable process as much as the 
ignorant. 

c. Victories in political government depend upon the ability 

of a party to build a unified organization which has 
sufficient attracting power to cause the majority to de- 
sire to be attached to it. The attracting power depends 
on the ability of the organization to understand and 



382 T he FolJ^ore of Capitalism 

put into slogans the unexpressed aspirations of the 
people, and to reconcile needed organizations with these. 

Illustration: The present failure of the Republican party 
is due to the fact that the central organization has lost touch 
with the ideals of the newer generation. For this reason they 
are unable to select an appealing hero and when they attempt 
to be purely political and appeal to the emotions of the mob, 
they have the lack of skill characteristic of those who do not 
understand the culture in which they are operating. In other 
words, they have lost organizing ability. 

d. It is important that political debate be positive and affirma- 
tive and not negative. When slogans appeal only to 
fears they hinder organization. The side with the posi- 
tive slogans will therefore have the advantage. 

Illustration: This is characteristic of all arguments, great 
and small. In a lawsuit, where the record does not disclose 
issues which predispose the judge to one side or the other, 
the affirmative argument will be most effective. For example, 
if the plaintiff claims judgment on the ground that the 
transaction constitutes a trust and the defendant denies that 
it is a trust, plaintiff has the advantage. If on the other hand 
defendant admits that it is a trust, but claims he should win 
on the broad affirmative principles of ^‘estoppel,” he will have 
the advantage. It is a failure to understand this simple psy- 
chological phenomenon which makes brilliant dialecticians 
such poor advocates. They take comfort, however, in blam- 
ing the ignorance of judges and spend their time in research 
trying to find a better way of selecting judges than the one 
we have. Needless to say, the schemes the dialecticians advo- 
cate are seldom adopted. If they ever are adopted, the same 
situations arise again, whereupon the brilliant dialecticians 
prove that the scheme would have been all right if it had 



Some Principles of Political Dynamics 383 

not been ruined by the misinterpretation of the judges. Law 
schools are erected as a refuge for this type of thinking. 

In the same way a study of political campaigns will show 
that an affirmative argument, however fantastic, is better 
than a negative one. The career of William Hale Thompson, 
who maintained himself in power by a series of affirmative 
absurdities, which included a call to arms against the King 
of England, illustrates this. His opponents spent their time 
showing how wrong he was. Just as soon as they had ex- 
posed the falsity of one slogan, Thompson was off on an- 
other. He always maintained the aggressive. His opponents 
were always on the defense. His success was amazing. 

e. Liberals and intellectuals usually fail as political organ- 

izers because they desire their slogans to be accurate and 
logical rather than^ollficar. When they try to become 
politicians, a feeling that they are betraying the great 
truth of intellectual integrity makes them confused and 
ineffective. They are the very worst kind of combat 
troops because they are constantly siding with the 
enemy. 

Illustration: Thus we find Oswald Garrison Villard, the 
great liberal, joining with the Liberty League to defeat the 
court plan of President Roosevelt, on perfectly logical 
grounds but unmindful that political battles are wars be- 
tween opposing groups. Recently Heywood Broun criticized 
violently the editorial policy of the Nation because that publi- 
cation refused to realize that the objectives to which it was 
committed could only be accomplished by building up new 
organizations. The Nation, he claimed, was spending half 
its time undermining the emotional position of its own side. 

f. A political party which attracts only learned men and 

thinkers, instead of organizers, will always fail in reach- 



384 The Folklore of Capitalism 

ing its political objective, because its campaign will be 
based on the illusion that correct logic will win in the 
long run over political techniques, or else that if it 
doesn’t win it is the duty of intellectuals to keep on try- 
ing to create an atmosphere where it will win. 

Illustration: Norman Thomas and his Socialist party. 

22. The failure of respectable people with humanitarian 
values to be effective in this country may be traced to their 
complete misunderstanding of the functions of public con- 
troversy, Unaware of the fact that it is not logic but organi- 
zations which rule an organized society they select logical 
princt^es as objects of thetr loyalties instead of organizations. 

Illustration: The disappearance of intellectuals in every 
government which operates in a logical frame of reference is 
inevitable. It has been marked in Russia, Germany, and 
Italy. Governments which are trying to stabilize themselves 
in precarious situations and which are, because of this very 
fact, operated by violent and bold men, usually kill or deport 
the intellectuals of the country. First they liquidate the in- 
tellectuals on the opposing side. Then they liquidate their 
own intellectuals, who inevitably become nuisances because 
they insist that the new organization live up to its conflicting 
ideals regardless of political consequences. We suspect that 
this latter process has much to do with what is going on in 
Russia today in the persecution of the intellectual followers 
of Trotsky. 

England seems to have a better understanding of the nec- 
essary inconsistencies of public ideals. It therefore on the 
whole is able to keep more humanitarian people in power be- 
cause of its realization that government has two functions: 
(i) to put on a public show; (2) to be exceedingly practical 
behind the scenes. To this ability — to believe in principles and 



Some Principles of Political Dynamics 385 

at the same time make them work for organizations, rather 
than compel organizations to work for principles — may be 
attributed a large part of the success of that small country in 
dominating a continent composed of nations far stronger in 
physical power. 

The fact that rigorous diqlecticjind the so-called intel- 
lectual skills are not effective in organization is con- 

demnation of intellectuals, Th^intelkct^ 
dreamj oi mqn^ o^d^^d tvqrld. They help to create 

intellectual order out of the tangled folklore of the time. They 
are the mqk(^s of policy and the formulators of principles in 
situations where the public demarids slogans. 

Illustration: We choose our illustration from a narrow 
field. Its relevance to the function of all the larger policy- 
making bodies— legislative, religious, or judicial— should be 
apparent. 

Testifying before the Securities and Exchange Commis- 
sion as to the organization of Foreign Bondholders Protec- 
tive Council, a practical body which also had to have ethical 
and philosophical concepts to give it unity, the President, 
J. Reuben Clark, Jr., said: 

Q. Mr. Clark, I believe you stated yesterday that the meetings 
of the members of the Council were held annually except for 
special meetings that might be called. 

A. That is, the meetings of the directors. 

Q. The full members? 

A. Yes, sir. 

Q. And I believe you stated that there had been one special 
meeting called? 

A. One special meeting. 

Q. Then it would be fair to say that the directors, the full 
members, do not actively participate in the work of the Council? 
Is that true? 



386 The Folklore of Capitalism 

A. Yes, sir. But I should like to make something of an ex- 
planation there, if I may. Wc are not conducting a business in 
the sense of investing money or incurring monetary obligations, 
or anything of that sort. There is only the work of the detail of 
negotiations after broad, general principles arc settled, and these 
principles have from time to time been reported to the directors; 
so that unless you were to ask the directors to come to New York 
to participate in any kind of negotiation there would be very little 
that the directors could do. 

Q. May I ask you this question? Do the directors serve a real 
function, from your point of view? Are they useful? 

A. Yes; they are useful. 

Q. In what way are they useful? 

A. Well, they are useful because they are able to explain in 
their various areas the functions and purpose of the Council. 
They are useful in giving us the advantage of their views and 
wisdom on broad principles of policy. 

Q. Do you get their views? 

A. Yes; when they come to meetings. They have settled some 
of these questions of policy; and they have been reported to them 
and discussed by them. 

Q. The discussions are largely on matters of policy, general 
policy, not specific situations? Is that true? 

A. Yes, sir; that is true. 

Q. Have they been useful in bringing in members and getting 
contributions or advances? 

A. Yes, sir; they have been useful in that respect 

Q. Your executive committee is the group that docs the work? 

A. Yes, sir; that is correct. We hold an executive committee 
meeting once a week, and at that meeting everything which the 
Council is doing or contemplating doing is reported to the execu- 
tive committee and passed upon by the committee, including the 
details of all negotiations. 

Q. Mr. Clark, are the negotiations carried on by the president 
and the vice-president? 

A. Primarily; subject, of course, to this consultation with the 
executive committee. 



Some Principles of Political Dynamics 387 

Q. That is, the president or the vice-president of the Council ? 

A. Yes, sir; the executive vice-president. 

Q. The executive vice-president? 

A. Yes, sir; the executive vice-president. 

Q. Would you feel that the Council would operate and func- 
tion as well without a board of directors of the size that it has ? 

A. Not at the present time. If the Council were more firmly 
established or were in the position, let us say, of the British Bond^ 
holders Council, it might be that the actual service of the directors 
could be performed by a fewer number of persons. 

Q. May I ask you this question, Mr. Clark? Are the directors 
useful primarily from the point of view of public relations of the 
Council? 

A. I should hardly like to say that. . . . That is certainly one 
of their principal uses and values. But we have had some very 
valuable suggestions from them in the matter of our policies.’-^ 

It is apparent that the Council referred to above is per- 
forming a function similar to that of the Supreme Court of 
the United States. The activities of this particular group do 
not need an elaborately formulated body of doctrine, or a 
highly specialized priesthood, but all the essentials of a typi- 
cally ceremonial and authoritarian institution are present. So 
far as practical activity is concerned a smaller committee 
which argued less about policies would get more done. Yet 
it is hard to imagine any group of men engaged in any or- 
ganized activity, whether it be athletics or business, which 
can get along without some ceremonial body devoted to giv- 
ing it what the Chinese call “face.” 

24. The gradual decline and fall of social institutions are 
not the result of revolutionary ideas held by their opponents, 
but rather are the product of the phobias against practical 
common-sense action produced by their own ideas. 

Supra, Note i, Part V, “Protective Committees and Agencies for Hold- 
ers of Defaulted Foreign CJovcrnmcntal Bonds,” pp. 82-83. 



388 T he Fol\lore of Capitalism 

Whenever the slogans of any organization cease to be a 
source of inspiration and positive action, and instead become 
a source of fear, the power of the organization declines. This 
is particularly true of economic and legal philosophies. Revo- 
lutionary ideas are ordinarily described as the cause of revolu- 
tionary movements. A better way of putting it is that the 
failure of older social organizations to act leaves a vacuum 
into which some new organization is bound to flow. The 
slogans of the new organization will certainly be contrary to 
the slogans of its enemies. The growth of the new organi- 
zation, however, will be due to the opportunity created when 
the older one was unable to act. The notion that a new or- 
ganization must reason its way into power or else lose the 
support of all thinking men is a common superstition among 
the commentators of our own day. For example, we sec it 
expressed in editorials and articles about the labor move- 
ment. John L. Lewis, if he would only think straight, could 
form a much more effective labor organization, in the opin- 
ion of the Tribune and the Times. Such an attitude prevents 
any understanding of a new political movement on the part 
of most of our current writers on current events. Lewis is 
taking advantage of a social need which his opponents are 
unable to meet. He is building the tradition and morale of 
his organization through combat tactics. The strategy of his 
opponents consists largely of the expression of fears and lam- 
entations. It offers no positive program. Until this psycho- 
logical situation is changed one may predict a continued in- 
crease in the power of the C.LO. 

An objective study of government is necessarily troubling 
to the intellectuals of our time because the prevailing mental 
pictures of our folklore compel us to deny the facts before 
us. Since those pictu re s represent current ideas of order and 
dij^nity in humamaffairs, objective observation of the facts 



Some Principles of Political Dynamics 389 

of social organization appears to those who believe in its cur- 
rent myths to present government as meaningless, amoral, 
and uncontrollable except by methods condemned by our 
folklore as unscrupulous. Men cannot face the world^Bdth- 
out some sort of religion; they cannot feel comfortable about 
their government without a set of idegl§ which cannot be 
supplied merely by scientific observation. Scientific observa- 
tion, therefore, cannot be used in government affairs unless 
it can be fitted into some governinental creed which is any- 
thing but scientific. 

For example, we cite two scientific studies which, taken in 
conjunction, could contribute the background for a program 
of practical action, the utility of which would not be denied 
by anyone. The first is the report of the National Resources 
Board, which gives us an idea of the vast possibilities avail- 
able for our comfort if they could be used. Second, is the work 
of Robert and Helen Lynd on Middletown, which presents 
a picture of the psychological hazards which make it difficult 
for existing organizations to use those resources to the fullest 
extent. Yet the use of these two scientific studies in conjunc- 
tion as part of the training necessary to understand govern- 
ment has as yet little recognition. An advertising enterprise 
designed to sell goods to Middletown could quite frankly 
base its campaign on such data. A governmental^rogram, 
however, must proceed on the assumptions of curre nt m y- 
thology. In other words, we lack a religion of government 
which permits us to face frankly the psychological factors 
inherent in the development of organizations with public 
responsibility. Governmental effort based on such factors is 
considered Machiavellian, and contrary to proper principles. 
We tolerate sucR an^Stitude on the part of politicians as a 
necessary evil. 

A governmental creed which enables men to face the facts 
about social organization without disillusionment and with 



390 T he Foll^ore of Capitalism 

positive enthusiasm for the opportunity presented is a pre- 
requisite to the use of scientific method in government. This 
is something more than the traditional “realistic’’ approach. 
There is plenty of “realism” in this country today, but it is 
the realism that leads to cynicism. In other words, modern 
realists are still so emotionally bound by the mythology that 
the facts which their honesty compels them to admit only 
make them sad because the human race is not different. 

Yet all the signs today point to the fact that a new creed, 
which can reconcile itself to the facts of human organization, 
is about to be born. It as yet has no formulas. It is represented 
vaguely by the personality of Roosevelt who has become a 
symbol for a political attitude which cannot yet be put into 
words. The fact that Roosevelt has become the symbol of a 
new attitude is shown by the fact that so many of those who 
support him are hostile or else indifferent to the particular 
measures he advocates. 

Many commentators express surprise at this. How can spe- 
cific measures advocated by Roosevelt be so unpopular with 
groups of people who still keep faith in him? Hostile edi- 
tors, observing the failure of some Roosevelt policy, are puz- 
zled over the continuing Roosevelt support. They attribute 
it to his charming smile, his radio voice, and whatnot. The 
answer to the problem of Roosevelt’s popular support in spite 
of the defeat of so many of his plans has little to do with his 
personal characteristics. Institutions which express in con- 
crete form the vague aspirations of any group always arouse 
that kind of allegiance. Never has this been expressed in a 
more striking way than by the parade of intellectuals who 
testified against the Roosevelt Supreme Court plan before the 
Senate Committee. These individuals stated that they disap- 
proved of the majority decisions of the Court on national 
affairs, yet they considered it essential to the nation that the 
Court continue in power over national affairs. For these per- 



Some Principles of Political Dynamics 391 

sons, composed of radicals and conservatives alike, the Court 
represented the supremacy of intellect and reason. Hence 
they were for it, no matter what it did. lb attribute this to 
Hughes’s charming manner or Sutherland’s public person- 
ality is to make the same mistake about the influence of the 
Supreme Court which is being made about the present 
Roosevelt influence. 

What Roosevelt represents to the great majority of the elec- 
torate cannot be so easily formulated because no authoritarian 
literature has developed (as it has with respect to the Court) 
to explain him as a symbol. Yet he expresses for a majority 
of the public the current distrust of old myths and the belief 
that the Government has a new role to play in providing for 
security of individuals in their jobs and in the distribution of 
goods. The position of a living man as such a symbol has 
always been precarious, because dead men are much safer in 
such niches than the living. Nevertheless, the writer believes 
that Roosevelt will continue to fill this symbolic need until 
something else is substituted. If he is beaten it will be by a 
philosophy of strong affirmation and not by attack. 

In Europe the rise of personalities to express national as- 
pirations which older institutions could not fulfil has taken 
the same course. These social phenomena are inevitable. The 
type of personality that will take the place of a philosophy of 
government depends on the culture of the time; and the re- 
sults, particularly in conditions which border on anarchy 
and where defeat and discouragement have created a national 
psychosis, are not always happy. But we are here not sitting 
in judgment on such phenomena, we are only observing 
them. 

When national aspirations are expressed in an individual 
who is also in command of practical affairs, a nation does 
not have the stability which comes from a Church which is 
removed from the marketplace. Individuals can become 



392 T he FolJ^ore of Capitalism 

symbols only in unstable times. Lincoln would never have 
been the great myth of national unity had it not been for the 
Civil War. He came to represent a new concep^^^ of the 
^at:e.1loosevek has a less securFpIacelSecauselhe aspirations 
which he represents are less concrete. Nevertheless, the men- 
tal pictures of a society which are first — in times of confusion 
—represented by an individual, inevitably become part of the 
folklore later. And in that process comes stability. 

Roosevelt will lose his present symbolic importance when 
the attitude toward government which he represents has be- 
come expressed in an inspirational literature which is gen- 
erally accepted as a sort of backlog of fundamental principles. 
In this highly organized age, attitudes toward the function 
of government must be redefined, and until that process is 
complete ajersonality will take the place of a philosophy. 

The redefinition of attitudes which must take place has 
nothing to do with the advocacy of particular measures. 
Legislation will be in the future, as it has been in the past, 
the result of pressures of various sorts. Political principles 
must always be infinite^_elastic. It is only important that 
they represent public attitudes and do not strangk public 
needs. 

Here lies the opportunity of those spinners of national 
dreams whom we call our intellectuals, and who are com- 
posed of our lawyers, our economists, and our editors. To- 
day an individual personality is more important than any 
governmental principles because those principles represent 
fear^ and inhi biti ons instead of inspiring action. The Con- 
stitution has ceased to be a charter of positive government. It 
is only a protection against unholy desires. Editorial eco- 
nomics, which are the only kind that ever reach the people, 
are simply a list of impending disasters. Those who most de- 
sire to substitute the ideal of a rule of law for the worship of 
a single personality are doing everything to defeat their own 



Some Principles of Political Dynamics 393 

ends by refusing to advocate an attitude toward the function 
of government which will make that personality less impor- 
tant. 

This usually happens in times of s ocial c hange. And yet I 
have a feeling that it need not happen if the functions of gov- 
ernmental creeds and mythologies are understood by our 
pri esth ood. Understar^ing can at least tend in the direction 
of preventing anger and excitement in government which de- 
stroy practica]Qudgment. It can prevent the application of im- 
possible standards to new organizations fumbling about to 
fill some social need. It can tolerate experiment as something 
essential in meeting changed conditions. It can modify the 
bitter clash of extreme positions. And best of all, it can divert 
the minds of intelligent people from the futile task of trying 
to dictate the culture of the next generation, while neglecting 
the problems of their own day. 

I have no doubt as to the practical desirability^ of a ^ciety 
w^re principles and ideals are more important than individ- 
i^Is. It is an observable fact that such a society is more secure 
spiritually and hence more tolerant. Yet the belief that there 
is something peculiarly sacred about the logical content of 
these principles, that organizations must be molded to them, 
instead of the principles being molded to organizational 
needs, is often the very thing which prevents these principles 
from functioning. The greatest destroyer of ideals is he who 
believes in them so strongly that he cannot fit them to prac- 
tical needs. 




Index 


Abbott, Edith, 155, 157-158 
Adams, James Truslow, 57 
Administrative Ia\v, 91, 372-375 
Advertising, 41, 313 
Agricultural Adjustment Act, 339 
Alexander, Jack, 371-372 
Aluminum Company of America, 
220 

American Bar Association and the 
Supreme Court, 29, 52-55 
American Businessman, 35-36 
American Law Institute, 77-78 
American system, 71-74 
Angly, Edward, 200 
Antitrust policy, 207-229 
Artificial remedy, 56 
Assets, government, 174 
mythology of, 122, 3 12-3 17 

Baldwin, Roger, 190 
Bank credits, 201 
Bankruptcy, 233-237 
Bellamy, Edward, 221 
Bigness, the curse of, 210 
Borchard, Edwin M., 283 
Brain trusts, 117 
Brookings Institution, 6 
Browder, Earl, 7 

Budget balancing, 102-104, 170- 

174 

Bureaucracy, ii, 30, 31, 53-55 
Byrd, Senator Harry, 155, 156, 158, 

159 

Capital assets, 3 12-3 17 
Capitalism, in defense of, 22 
preservation of, 61 
Capitalism vs. Fascism and Commu- 
nism, 61-62 


Capitalization of earning capacity, 
202 

Cardozo, Mr. Justice, 46, 340 
Catholic Church, 15, 16, 23 
Chase, Stuart, i 
Chicago Tribune, 7 
Chivalry, 34 

Church in business, 361-362 
C.I.O., 35, 335 

Civil Liberties Union, 190, 191 
Civil service, 37, 325-326 
Communism, 2, 12-15, 36, 37 
Competition, suppression of, 221- 
222 

Constitutions, 26-29, 77-79 
Copernican revolution, 163 
Corporate reorganization, 230-262 
Corporate trustees, 238-239 
Corporation, personification of, 185- 
206 

Corruption, function of, 369-371 
Creditors’ suits, 235-236 
Creeds, 10 

decline of, 119-121 
institution of, 1 39-1 42 
of government, 26-32, 40-45 
Crime, 106, 369 
Cromwell, J. R., 22 
Cuban Cane, 292-301 
Czerwonky, Hugo E., 22 

Davis, John W., 7, 190 
Debt and investment, 231, 232 
Definition, the process of, 179-184 
Democracy, 40-45 
Devil, necessity of in government 
theory, 5, 9 
Dewey, John, 10 1 
Dictatorship, 53-55, 75 
Direct vs. indirect taxation, 316-318 



396 T he Folklore of Capitalism 


Diversification of investment, 266- 
267 

Divine right of governments, 42 
Donovan, William J., 54 
Dorfman, Joseph, 186-187, 218-219 
Douglas, W. O., 247, 293 
Dramatic character of political cam- 
paign, 144-145 
Due process of law, 33-34 
Dulles, John Foster, 243, 244 
Duranty, Walter, 134, 3 45 - 3 4 ^ 

Earhart, Amelia, 156 
Economic and legal learning, infla- 
tion of, n 5-1 1 7 

Economics and law, prophecies, 65- 
66, 134-135, 200 
Education, 7 

and the thinking man, ii 
as a social remedy, 134 
Efficiency, 168-170 
Einstein, 166 

Electric Bond and Share, 194-196 
England, 12 

Experimentation by state, 94-96 
Ezekiel, Mordccai, 102-103 

Farleyism, 75, 99 
Farm surplus, 284 
Fascism, 2, 12-15 
Fees in reorganization, 252-258 
Fiscal thinking, 31 1-3 12 
Flynn, John T., 80, 222, 223, 224 
Ford, Henry, 19, 13 2-1 33 
Ford Motors, 97, 98, 310 
Foreign Bondholders Protective 
Council, 275 
Foreign bonds, 271-278 
Frankfurter, Felix, 190 
Free will, in a social organization, 
5-12 

Gambling, 318 
General Motors, 19, 51 
strike, 191 


German inflation, 102 
Germany, and the Jews, 8, 9, ii, 37, 
45 

military, mythology of, 188 
Goodrich, Carter, 95 
Government 

creeds of, 10, 26-32 
mythology of, 33-40 
systems of, 2-45 

Government corporations, 315-316 
Government housing, 156-160 
Government interference with busi- 
ness, 263-265 
Government waste, 264 
Governmental theory as a recon- 
ciliation of contradiction, 113- 
115 

Greece and Rome as a warning, 120 
Groves, Wallic, 240, 251 

Harding, T. Swann, 268 
Harlow, Jean, 354 
Harvard Tercentenary, 17-20, 40 
Hayden, Charles, 292-301 
Hearst, William Randolph, 7, ii 
Hcdden, Charles, 260, 261 
Hell, necessity of in government 
theory, 5, 9 
Heresy, 3» 5» 7» 21, 22 
History, lessons of, 10 
Hidcr, 17, 30 > 3 i» 45 
Holding companies, assets of, 228 
Holding company device, 174-176 
Hopkins, Ernest M., president of 
Dartmouth, 1 97-1 99 
Housing, 98-99, 3 19-321 
governmental, 156-160 
Hughes, Mr. Chief Justice, 339 
Humanitarianism, 169 

Industrial organization as private 
property, 1 27-1 31 
Inflation, 102-104, 301 
of learning, 115-117 
Insolvency of organizations, 234 



Index 


397 


Institute of Public Opinion, 78, 10 1, 
262 

Institutional creeds, 1 39-1 42 
Institutions 

creeds of, 26-32 
habits of, 32, 33 
mythology of, 33-40 
pattern of, 24-26 
personality of, 136-137 
Insull utilities, 305 
Intellectuals, place of, 385, 392 
Investment, 264-265, 305-309 
Investors, mythology of, 250-251, 
265 

Jackson, Robert H., 2 12-2 14 
Jesuits, 56-57 
Johnson, Herbert, 63 
Hugh, 6 

Josephson’s Robber Barons, 216 
Justice vs. injustice, 167 

Kelly, Fred C., 134 
Kreuger-Toll reorganization, 241- 
245 

Kuhn, Loeb & Co., 256 
Ku Klux Klan, 79 

Laissez faire, 75-77, 97, 112, 189, 
245, 343 

Landis, James M., 19 1, 192 
Landon, Alfred M., 76-77 
Laswell, Harold, 302 
Law and economic prophecies, 65- 
66, 134-135, 200 

Law and economics as institutional 
language, 1 45-1 50 
Law, disrespect for, 106 
Law, rule of, 26, 29, 37, 62-64 
Learning, technical vs, philosophi- 
cal, 84-86 

Lecher, Lewis A., 54 
Legal and economic learning, in- 
flation of, 1 1 5-1 1 7 
Legislative fumbling, 329-331 


Legislative function, 64 
Lewis, John L., 4, 51-53, 191 
Liberal movements, 112 
Liberty League, 7, 71, 77, 78, 79 
Lindbergh, Charles A., 346 
Lippmann, Walter, 93-95, 198 
Liquidity, 201, 266-267 
“Long-run” argument, 97 
Lowenthal, Max, 246 
Lynd, Robert and Helen, 358, 389 

McClellan stores, 259-261 
McNary-Haugen bill, 284 
Manipulation of securities, 222-224 
Manufacturers’ Association, 71-74 
Market dominance, 226-227 
Markey, Morris, 258 
Marsh, Benjamin, 90 
Marx, Karl, 93 

Medical and political science com- 
pared, 55-60 

Mencken, H. L., 146-148 
Middletown in Transition, 389 
Minority parties, 31 
Morgan, E. M., 84-85 
Mormon, Book of, 9 
Murphy, Governor Frank, 191 
Mythology, discomforts of change, 
119-121 

of assets, 3 12-3 17 
of investment, 250-251, 265 
of private property, 1 21-127 
of social institutions, 33-40 

National Economic League, 105- 

107, 139 

National Policy Committee, 364 
National Recovery Act, 221, 227, 336 
New Deal, 8r 
New Republic, 7 

New York, New Haven, and Hart- 
ford Railroad, 48-50 

Objective vs. rational diagnosis, 142- 

145 



398 T he Folf(lore of Capitalism 


Old-agc pensions, 88-89, 106 
Old-age security, private, 309 
Olney, Warren, Jr., 53 
Ownership of corporations, 191—196 

Panacea, 56-57 

Parables of government, 333 

Paramount Publix, 252-258 

Paramount reorganization, 35 i ~352 

Paris, University of, 18, 19, 55, 163 

Patent pools, 225-226 

Pcgler, Westbrook, 366-367 

Pepper, George Wharton, 54, 150 

Peruvian bark, 89 

Polar words described, 167-179 

Political dynamics 

absence of institutional conflicts, 

376 

defined, 349 

dependence of learning on con- 
flict, 365 

development of new institutional 
words, 378 

difficulties in terminology, 348- 
349 

function of liberal movements, 

375 

institutional ceremonies, 358, 376 
institutional change, 351, 378 
institutional character, 355 
institutional creeds as dcscripdons, 

376 

institutional inconsistencies, 355, 
356. 357 

institutional learning, 364, 365 
institutional personality, 350 
institutional phobias, 386 
institutional property, 352-353 
institutional reconciliation of con- 
flicts, 358 

institutional survival, 355 
intellectuals, function of, 385 
practical vs. spiritual institutions, 

360, 371 


public debate, function of, 379- 

385 

reconciliation of conflicts by sepa- 
rate institutions, 360-361 
reform institutions, 367 
submerging of the individual, 
353.354 

sub rosa institutions, 366 
Political machines, 34, 43, no, 113, 
1 1 5 , 369-372 

Political platforms, loo-ioi 
Polls of Institute of Public Opinion, 
78, lOI 
Polybius, 46 

Pooling of patents, 225-226 
Populist party, 218, 219 
Posterity, 19 
Potato Act, 54 

Predictions, economic and legal, 65- 
66, 134-135, 200 
Price leadership, 159, 226-227 
Prices considered as taxes, 267-269 
Private property, 12 1-127 
Private vs. public government, 107- 
109 

Procedure reform, 176-177 
Profit motive, 127, 204, 303 
Prohibition, 113, 114, 152 
Prohibitions of disaster, 65-66 
Protective committees, 239-250 
choice of security holder, 290-292 
conflicting interests, 292-301 
for foreign bond holders, 285-292 
motives for serving, 288-291 
self-appointed type, 287-288 
Psychiatrists, attitude of, 69-70 
Psychology in law and economics, 

I 30-1 3 I 

Psychology of social institutions, 21, 
45 

Public works in foreign countries, 
277-278 

Quinine, 89 
introduction of, 55-58 



Index 


399 


Rational vs. objective diagnosis, 

142-145 

Real estate bond committees, 247- 
250 

Realistic attitudes, 161 
Receiverships, 235-236 
Reformation, 15, 16, 17 
Regimentation, ii 
Relief, 1 53-155* 203 
Reorganization, in general, 230-231 
Reorganization fees, 252-258 
Revolutionary process, 341-342 
Robey, Ralph West, 65 
Robinson, E. S., 91-92, 1 42-1 45 
Rockefeller, John D., 4 
Roman Church, 15, 16, 23 
Roosevelt, Franklin D., 1 44-1 45 

Theodore, 21 1 

Roosevelt as a symbol, 391-392 
Roosevelt Court Plan, 52-55 
Root, Clark, Buckner and Ballan- 
tine, 256 
Root, Elihu, 256 
Rosenwald, Julian, 353 
Rotary clubs, 24, 39 
Rugged individualism as a justifica- 
tion for corporate organization, 
188, 190 

Russia, 8, 9, n* 45* 345* 34^ 

Saturday Evening Post, 7, 10 
Schenkcr, David, 251 
Scholarship, fields of, 128-130 
supreme court of, 18-20 
Securities, manipulation of, 222-224 
Securities and Exchange Commis- 
sion, 238, 239, 240, 241 
Sit-down strike, 51, 88, 191 
Skilled labor as an asset, 202 
Sloan, Alfred T., 71-74 
Social bookkeeping of tomorrow, 
343 

Social cost, 170 
Social plans, 83 
Social security, 88-89 


Social Security Act, 193 
Spiritual vs. temporal government, 
110-113 
Stalin, 345-346 
Standard Oil trust, 220 
States rights, 94 
Stinchfield, Frederick H., 53 
Stock selling, 305-309 
Stone, Mr. Justice, 339-340 
Straus, S. W., and Co., 124, 125, 
173, 247, 249, 250 
Subconscious mind, 166 
Sullivan, Harry Stark, 163 
Sullivan and Cromwell, 244 
Supreme Court 

function of, 28, 29, 62-64 
philosophy of, 337-340 
reform, 52-55* 339-340 
Supreme Court and the corporate 
personality, 189 

Supreme court of economics, 66-67 
Supreme court of scholarship, 18- 
20, 29 

Surplus goods dumping, 280-284 

Sw^cn, 9, 12, 332 

System of government, 2, 45 

Tammany Hall, 43, 128, 235, 371- 
372 

Tax administration, 322-323, 373- 
375 

Taxation, government, malevolence 
of, 31 1-33 1 

private methods of, 271-277 
Taxation by private organization, 
263-310 
Tax ethics, 324 

Technological unemployment, 96- 

98 

Temporal vs. spiritual government, 
110-113 

Tennessee Valley Authority, 315 
Tennyson, Alfred, Lord, 14 
Thacher, Thomas D., 257 
Thinking man, the, 5-12 



400 The FolI{lore of Capitalism 


Third party movement, loi 
Thomas, Norman, 7, 13, 14 
Thompson, Dorothy, 17-18, 278- 
280, 362-363 

Tovimsend, Dr. Francis E., 75 
Traders as organizers, 126 
Trials as political propaganda, 344 
Trust busting, 208-212 
Truth in a political world, 1 5-20 

Unemployment relief, i53-i55» 203 
Untermycr, Samuel, 243, 244 

Vanderlip, Frank A., 254 
Vcblcn, Thorstein, 186, 218-219 


Venereal disease, 86 

Vice, function of, 368 

Villard, Oswald Garrison, 80, 383 

Wages and hours bill, 362-363 
Wages and hours regulation, 90 
Wagner Labor Relations Act, 339 
Waste, I, 2, 170, 171, 314-315 
Waste by private organization, 267, 

313 

Wayland, Bishop Francis, 186 
Wickersham Commission, 152 

Yale Institute of Human Relations, 
39, 40